(Updates currency in fifth paragraph.)
Jan. 23 (Bloomberg) -- Sweden’s central bank has the ammunition it needs to prevent krona gains from triggering a deflationary trap, Deputy Governor Karolina Ekholm said.
“We have quite a bit of room for further cuts,” Ekholm, 48, said yesterday in an interview in Stockholm. “The natural thing to do if the exchange rate should change in a way that risks deflation is to use the monetary policy rate to try to lift inflation toward the target. A deflation scenario isn’t something that anyone on the board would shrug off.”
The comments come amid concern over the currency’s strength and its corrosive effects on economic growth as exporters are already struggling to cope with slumping demand from Europe, the nation’s largest export market. Sweden’s Finance Minister Anders Borg said this week that the Riksbank’s policy is propping up the krona and preventing the exchange rate from helping to sustain an expansion.
The $500 billion economy is stalling as some of the biggest companies, including Volvo AB, have cut jobs to adjust to a plunge in demand from debt-stricken Europe. Sweden emerged as a haven last year from the crisis, boosting the krona to a 12-year high versus the common currency in August. Over the past 12 months, it’s up 0.9 percent against the euro and 3.2 percent against the dollar.
The krone slid 0.3 percent against the euro to 8.6969 as of 5:34 p.m. in Stockholm. It declined 0.5 percent versus the dollar to 6.5399.
Sweden’s consumer prices fell annual an 0.1 percent in December, declining for a second month, a report last month showed. The Riksbank’s preferred measure, which factors out mortgage costs, showed an annual inflation rate of 1 percent, far below its 2 percent target.
While Ekholm for now said Sweden isn’t facing deflation, the currency is a “central component” in its inflation view.
Ekholm, who argued for deeper rate cuts than most of her fellow board members all of last year, last month joined the majority in voting to lower rates for a fourth time in 12 months, reducing the benchmark to 1 percent. She went against the mainstream in advocating one more cut this year as the majority of the board signaled it won’t lower rates further.
Policy makers, including Governor Stefan Ingves, have warned that rates can’t stay too low because domestic credit growth poses a risk to the economy. Household debt rose to a record 173 percent of disposable incomes last year from 90 percent in the mid-1990s to finance rising property prices.
Still, last month’s meeting also showed that other board members are opening up for larger cuts. Deputy governors Per Jansson and Barbro Wickman-Parak “thought a great deal” about lowering the repo rate by half of a point last month, according the minutes released on Jan. 8
Deputy Governor Lars E.O. Svensson, who like Ekholm called for bigger rate cuts last year, said on Jan. 16 that the economy “would manage better in this very difficult, weak economy with a lower rate and a weaker krona.”
Ekholm said that she doesn’t see her fellow board members as locked in their positions.
“Conditions are in place that we at some point will be united in our view on how the path should look because it’s, after all, the same kind of factors that we’re worried about even though we’ve put very different emphasis on” household debt, Ekholm said. “I have put zero emphasis at something that’s been very important to others but things like that can change a little over time depending on what happens.”
The deputy governor also said that for now it’s too soon to call an all clear on Europe’s debt crisis amid signs investors have become more optimistic that European policy makers have managed to contain the region’s debt crisis.
“It’s good that things are looking more stable on the financial markets, but given that the underlying problems remain and a lot of adjustments remain in individual EU countries, it’s nothing that makes me breathe a sigh of relief,” she said.
--Editors: Jonas Bergman, Niklas Magnusson