Rabobank Sees Swedish Krona Gains as Rate Hike Risks Rise

Key Moments

Rabobank’s Jane Foley highlights that Sweden’s benign CPI and CPIF inflation have allowed the Riksbank to delay rate hikes relative to many G10 peers despite supply disruptions from the Iran war.
With the impact of earlier VAT cuts on food prices set to fade and growth indicators improving, markets are pricing in 30 bps of Riksbank tightening over a 6-month horizon.
Rabobank anticipates EUR/SEK to trade in a range in the near term, with a “moderately firmer” Swedish Krona expected into year-end.

Riksbank Seen Better Placed Than G10 Peers

Rabobank Senior FX Strategist Jane Foley observes that Sweden’s current inflation backdrop, measured by both CPI and CPIF, has remained relatively benign. This has left Sweden and the Riksbank in a stronger position than many other G10 central banks to postpone interest rate increases, even as the Iran war contributes to supply disruptions that have prompted some peers to consider earlier or more aggressive policy tightening.

According to Foley, this more favorable inflation profile has so far allowed the Riksbank to “side-step a policy move” at a time when other G10 monetary authorities face heightened pressure to raise rates.

VAT Effects, Growth Data, and Rising Rate Expectations

The analysis notes that the impact of Sweden’s previous Value Added Tax reduction on food prices is expected to diminish next year. As that temporary disinflationary effect fades, Foley argues that pressure on the Riksbank to lift interest rates is likely to increase.

Market pricing already reflects this shift. Foley points out that investors are positioned for 30 bps of Riksbank rate hikes on a 6-month view, indicating that expectations for tighter policy are building as growth data improve.

IMF Assessment and Policy Guidance

The article highlights that recent economic outcomes in Sweden “likely encouraged the IMF to conclude in its July staff report on Sweden that the country’s “cyclical economic recovery is ongoing on the back of policy support and a rebound in real incomes”.”

Additionally, Foley cites the Riksbank’s latest policy communication: “Indeed, its policy guidance last month stated that “the probability of the rate being raised later this year has increased compared to the assessment in March”. This outlook largely supports the market’s assessment regarding rate hike risks.”

SEK Outlook: Range Trading Now, Firmer Bias Into Year-End

On the currency front, Foley expects the EUR/SEK pair to remain in a trading range in the near term. However, she sees potential for the Swedish Krona to strengthen moderately toward the end of the year.

As summarized in the report, “While we see scope for range trading in EUR/SEK near term, for choice, we expect a moderately firmer tone to emerge in the SEK into the end of the year.”

Summary of Policy and Market Views

Aspect	Comment
Inflation backdrop (CPI/CPIF)	Described as benign, allowing the Riksbank to delay hikes versus many G10 peers.
External shock	Supply disruption from the Iran war has increased tightening risks for many G10 central banks.
VAT impact	Fading effect of the VAT cut on food prices expected to add to rate hike pressure next year.
Market pricing	Positioned for 30 bps of Riksbank rate hikes on a 6-month view.
IMF view	IMF July staff report sees Sweden’s “cyclical economic recovery” as ongoing.
Riksbank guidance	States that the probability of a rate increase later this year has risen versus March.
FX outlook (EUR/SEK)	Range trading expected near term, with a moderately firmer SEK tone into year-end.