The Swedish currency is undervalued and will strengthen in the long run, Riksbank Governor Erik Thedeen said in a speech on Friday, the day after the central bank hiked rates for an eighth consecutive time to curb soaring inflation in part generated by the feeble crown.
“In the short term and perhaps also the slightly longer term, the exchange rate can vary in a way that only has a weak link to developments in the real macroeconomic, for instance, it may weaken over a relatively long period of time,” Thedeen said.
Thedeen said that there were market participants that are trading the crown based on trends rather than on the fundamental strength of the Swedish economy, but that the crown eventually would strengthen.
“When the krona is weak, it becomes profitable to invest in Sweden. Swedish equities, bonds, property, etc. should therefore ultimately appear attractive to foreign investors,” he said, adding that the appreciation of the crown could be quick.
Thedeen said studies, international ones as well as the Riksbank’s own, showed that the crown was undervalued by 10-15%.
The weak crown is a headache for the Riksbank as imported goods become more expensive, pushing up prices across the economy.
“When the krona is weak, it becomes more difficult to bring down inflation, which is worrying. But Sweden’s economy is essentially sound and well-managed. This indicates that the exchange rate will strengthen in the long run,” he said.
The central bank on Thursday raised its key policy rate by a quarter percentage point to 4.00%, as expected, and said it might need to do more to bring inflation back to its 2% target. (Reporting by Johan Ahlander and Anna Ringstrom, editing by Terje Solsvik, Essi Lehto and Niklas Pollard)