MUFG analysts argue that the Swedish Krona is underperforming as the Riksbank, central bank of Sweden, stays cautious despite the energy shock. With inflation soft and policy described as a “good initial position”, they see little chance of a near-term hike, and note that even optimism on a US/Iran deal has not yet sparked a meaningful Swedish Krona (SEK) rebound.

Soft inflation keeps Riksbank patient

"In contrast, the Riksbank in Sweden is not in a rush to follow the Norges Bank in raising rates. Recent weaker growth and softer inflation have given the Riksbank greater scope to look through the energy price shock. The latest CPI report showed headline inflation falling into negative territory in April, while core inflation (CPIF excluding energy) remained flat."

"These developments have provided the Riksbank with leeway to signal that the current policy rate offers a “good initial position” from which to adjust monetary policy if needed to safeguard the inflation target. The Riksbank did note though that it would consider raising the policy rate if the war were to have significant effects on the global economy and lead to a “broad and persistent” increase in inflation."

"This cautious guidance suggests that a rate hike is unlikely as soon as the next policy meeting in June. The Riksbank’s relatively dovish stance is contributing to the SEK’s underperformance, alongside the negative impact from higher energy prices. A similar pattern was observed during the last energy price shock in 2022 following Russia’s invasion of Ukraine."

"Even the recent optimism surrounding a potential agreement between the US and Iran to resolve the conflict and reopen the Strait has so far failed to generate a meaningful rebound in the SEK."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)