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Krona rallies after strong Swedish inflation figures

Sweden’s krona is on track for its best day against the euro in three months, after new data showed inflation was stronger than expected in May.

Consumer prices rose 0.1 per cent over the month, in contrast to economist forecasts of a 0.1 per cent contraction. That brought year on year inflation to 1.7 per cent, lower than the previous month but still a shade higher than the 1.6 per cent economists had forecast.

The Riksbank is moving to a new official inflation measure which is less skewed by its extraordinarily low interest rates, and using that measure – consumer price inflation with a fixed interest rate – the figures were even more encouraging, coming in at 1.9 per cent compared to forecasts of 1.7 per cent.

The central bank has struggled to keep inflation around its 2 per cent target level in recent months, encouraging it to reiterate its commitment to negative interest rates and quantitative easing. That has encouraged the krona to slide steadily as yield-hungry traders exploit the low interest rates to fund investments in higher-yielding currencies.

Today’s strong inflation data helped reverse some of that trend, with the krona appreciating 0.75 per cent to 9.7240 per euro.

However, anyone waiting for a reversal of the Riksbank’s recent dovishness is likely to be disappointed. Currency moves can have a big impact on inflation in the trade-dependent Swedish economy, and the central bank has made clear that it is reluctant to risk a rapid strengthening in the krona by raising interest rates sooner than the European Central Bank.

Torbjörn Isaksson at Nordea notes that today’s figures will be “welcomed by the bank and make more stimuli measures less likely. However, any turnaround in the Riksbank’s monetary policy stance is still a long way off”.