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This Country Is Doing Everything it Can to Boost Inflation

Riddarholmen IslandRiddarholmen Island
Riddarholmen Island, Stockholm, Sweden. Photograph by De Agostini via Getty Images

Sweden’s central bank is close to making its first foreign exchange intervention in 15 years in a desperate attempt to push up inflation, but critics say any effort to weaken the crown is likely to be futile.

The Riksbank has struggled to combat a largely strengthening currency despite cutting interest rates to record negative lows, due to a booming economy and loose monetary policy in much of the outside world.

With its monetary tools to ward off deflation dwindling, the Riksbank board gave Governor Stefan Ingves powers earlier this week to intervene immediately in the currency market. Minutes published on Friday of a meeting last month suggested that some policymakers believe intervention is the right way to go.

“Several members … noted that if the exchange rate appreciated too rapidly, currency interventions could be necessary,” said the minutes of the rate-setting meeting held in mid-December.

The ultra-low interest rates helped the economy to grow 3.9% year-on-year in the third quarter, the third highest rate in the European Union. Data on Friday showed industrial production was up 6% in November from a year earlier.

But with the main lending rate at -0.35% and the Riksbank pumping money into the economy by buying bonds, it faces a quandary. The loose monetary policy is failing to raise inflation but encouraging a rise in house prices and household debt, which per capita is one of the highest in Europe. Many people also fear a housing bubble.

“The tool box is getting empty,” said Nordea analyst Torbjorn Isaksson.

That leaves currency intervention to weaken the currency in the hope of pushing inflation towards the Riksbank’s target by raising the cost of imported goods and services. Analysts believe the Riksbank could start selling crowns at somewhere between 9.00 to 9.15 to the euro vs. 9.26 on Friday.