EUR/SEK: One Pinch at a Time

EUR, SEK, One, Pinch, at Time, Currency Analysis, Central bankers, ECB, fx trader, forex

23 Mar 2016

Central bankers must be cautious. An unexpected sudden change of economic conditions will have all eyes turning towards the central bank, even if the event had nothing to do with that sudden change of situation. The unwritten ‘policy change rule’ is to act, explain and then to allow for a sufficient time lag to measure the effect. Truly, central bank policy governors are ‘economic chefs’ in a way: change ingredients in small measured amounts and then see how the critics react.

At the 3 December meeting the ECB Governing Council decided to lower just one of the three key interest rates1: -10 basis points on the deposit facility to -0.30%. The main refinancing rate remained at 0.05% and the marginal lending +0.30%. The Council also decided to extend the duration of the asset purchase program until at least March of 2017, as well as including the purchase of other regional, marketable, euro-denominated assets. Lastly, it was decided that the principal payments on assets held under the program would be reinvested. Since the purchase target amount was not changed, the reinvestment of the return on assets may have reduced the need a little for open market operations in order to meet that target.

Although initially criticized as being insufficient by many analysts, the ECB Governing Council was merely following the classic central bank recipe of methodical prudence when changing policy. Further, the ECB is certainly well aware of the unintended effects a change in policy would have on non-Eurozone EU members, like Sweden for instance. Since as a  consequence it could perhaps force Riksbank to take an offsetting action.

The last 2015 Riksbank policy meeting was scheduled for 15 December, well after the ECB policy meeting2. Thus the Riksbank Executive Board had plenty of time to assess the ECB action and perhaps even observe the after effects. The Executive board statement noted an uptick in domestic growth as well as a positive movement in the Krona’s inflation rate. Further, the board clearly stated its intention to remain accommodative: “...The fact that inflation is rising is still mainly due to the weak krona, which has contributed to a rise in the prices of imported goods and services...”  Hence, a weaker Euro would make those imported goods and services less expensive in terms of Krona but conversely make Swedish exports more expensive. Clearly, this is not what the ECB would hope to accomplish within the intra-European Union trade zone.

EUR, SEK, One, Pinch, at Time, Currency Analysis, Central bankers, ECB, fx trader, forex Price Event ChartEUR/SEK Price Event Chart