In this blog post, which I started writing a couple of weeks ago but unfortunately only posted today, I speculated that the Riksbank might have to take further action if it does not want to loose credibility. However, I didn’t expect Swedish policymakers to move any time soon, given that the Riksbanks’ asset purchase program was just beefed up last October. So I was very surprised to find out today that the board just decided yesterday to reserve itself the right to engage in direct currency interventions in order to weaken the Swedish Crown (http://www.riksbank.se/en/Press-and-published/Press-Releases/2016/Delegation-decision-regarding-currency-interventions/).
Such a step, if implemented, would be quite unusual as other countries might regard it as competitive easing, a beggar-thy-neighbor policy. This is of course nonsensical. The primary goal of the currency interventions would be to increase the monetary base in order to stimulate domestic demand. The currency weakening is a side-effect of monetary easing and not a goal in itself. The monetary expansion and the depreciation of the currency would put upward pressure on prices, thus making it more likely for the Riksbank to achieve its inflation target of 2 percent. Even if there is a trade diversion from the weaker Swedish currency it will most likely be more than offset from higher Swedish demand for foreign goods. Given that Swedish monetary policy has been relatively tight over the last few years any further easing is highly welcome!