Too risky to hike now says Swedish central bank governor

Reuters

STOCKHOLM, March 6 (Reuters) - Raising Sweden's benchmark interest rate now would be too risky and might make it harder to reach the central bank's inflation target, Riksbank Governor Stefan Ingves said on Tuesday in comments that sent the Swedish crown to an eight-year low.

Inflation has dipped in recent months after hovering around the 2 percent target for most of last year, threatening the Riksbank's plans for a rate increase in the second half of this year .

The Riksbank is split over how fast it should proceed, but Ingves stressed the majority of rate-setters were likely to be cautious about tightening policy.

The Riksbank can relatively easily deal with a situation where inflation overshoots, but the opposite would be a problem, he said.

"We have said many, many times that if the crown strengthens too fast, we would have a problem with the inflation target," Ingves said.

The crown slumped to a eight-year low after Ingves's comments before recovering to stand at 10.19 to the euro.

In FX derivative markets, the ratio of krona puts to calls are near two-year highs according to Thomson Reuters data.

The krona traded around two standard deviations below its long-term average against the euro, indicating that bearish positions may be nearing an extreme.

But some analysts warned against betting too much against the Swedish currency.

"We would be cautious on shorting the krona at these levels," said Richard Falkenhall, senior FX strategist at SEB.

The crown has lost 3.5 percent of its value against the euro so far this year and is 7 percent lower than six months ago.

The weak crown - and a benchmark rate that has been stuck at -0.50 for two years - are at odds with an economy that has been outpacing most of Europe for years and is expanding robustly.

Riksbank Deputy Governor Henry Ohlsson said inflation was on target and that a lower-than-expected outcome in January did not change the overall picture.

"It is time to begin hiking," Ohlsson told reporters.

Swedish interest rates, inflation and the crown

Swedish krona valuations

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