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MONEY

Why the Swedish krona is expected to strengthen in the year ahead

In the last decade, the Swedish krona has generally been weak against major currencies like the US dollar and the euro. However, some analysts believe it may strengthen in the coming year.

Published: 5 July 2024 10:29 CEST
Swedish notes
Looking ahead, the economic advisory firm Oxford Economics expects the Swedish krona will hold onto its recent gains and could appreciate by another 2 percent against the euro in 2025. Photo: Swedish Central Bank/Press

In recent months, the Swedish krona has faced significant fluctuations against major currencies.

On June 28th, the krona lost ground following a softer-than-expected interest rate policy statement from Sweden’s central bank, Sveriges Riksbank.

After a rate cut in May (the first one since 2016), the Riksbank recently also indicated that interest rates could be reduced three more times by the end of 2024.

This announcement led to immediate reactions in the currency market.

The euro-krona exchange rate increased to 11.33 from 11.29 (meaning that you now need 11.33 kronor to buy one euro), while the pound-to-krona exchange rate rose to 13.40 from 13.34.

Despite this, some analysts believe the Swedish krona is poised for a rebound in the year ahead.

The krona’s long downward trend

In a recent report, Rory Fennessy, a senior economist at the advisory firm Oxford Economics, pointed out that the Swedish krona appeared undervalued.

Despite its underlying strengths, such as consistent trade surpluses (where Sweden’s exports exceed its imports), high productivity, solid public finances, and a credible central bank, the krona has been on a long downward trend.

Identifying a single reason for this persistent weakness over the past decade is a challenging affair.

Negative interest rates, which the Riksbank implemented in the late 2010s to achieve its inflation target, are often mentioned as an important factor.

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However, this explanation mainly accounts for the weakness against the US dollar. Around the same time, the European Central Bank (ECB) also had negative rates, yet, as Fennessy pointed out, the krona still weakened against the euro.

More recently, the Riksbank’s response to the inflation surge since 2021 has further weakened the krona.

“We think the Riksbank was slow to respond to the recent inflation shock. As late as February 2022, the Riksbank signaled in its official forecast that the policy rate would stay at zero until 2025. But by this point, broad price pressures were gaining momentum in the economy,” Fennessy said.

“At the next policy meeting in April 2022, the Riksbank started the hiking cycle, contrary to its earlier guidance, and has been playing catch up since.”

The currency roller coaster and interest rate cuts

This year, the Swedish krona has experienced significant ups and downs against major currencies.

According to Oxford Economics, this volatility has been caused by a mix of global factors and domestic events in Sweden.

Without these factors, the krona would likely have been more stable. 

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While inflation in Sweden is near the Riksbank’s target, the high real interest rates are hurting economic activity.

Therefore, experts expect the Riksbank to continue cautiously lowering interest rates, using this as the main tool to manage the exchange rate.

A year of gains for the Swedish krona?

After a period of significant volatility, the Swedish krona is expected to gain support from decreasing domestic risks and positive external developments, according to Oxford Economics.

“The Nordic currencies have been highly volatile this year. The Swedish krona and Norwegian krone both depreciated sharply until May but have since regained much of their losses,” said Fennessy.

“We believe both the Swedish krona and Norwegian krone will appreciate gradually this year and over the medium term, but there may be bumps along the way due to external factors and unexpected data.”

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Earlier this year, the Swedish krona weakened due to stronger-than-expected US economic activity and inflation. This led to changes in interest rate expectations and negatively affected Nordic currencies.

However, recent US economic data has been weaker, and Nordic central banks have adopted stricter policies to protect their exchange rates.

According to Oxford Economics, coordinated interest rate easing across these regions should help reduce external pressures.

The road ahead

Since early May, the Swedish krona has strengthened by 4.5 percent against the euro, even though the Riksbank cut interest rates before the European Central Bank did.

At the same time, lower-than-expected US inflation and weaker economic activity have reduced expectations for interest rate hikes in the US.

These changes in global economic data and risk sentiment have been among the main drivers of the krona’s recent ups and downs.

According to the Oxford Economics report, the Riksbank has regained its credibility now that inflation is near its target, and the next challenge is for the bank to ease its monetary policy at a pace that supports the economy without causing too much volatility in the currency.

This balance is crucial for maintaining economic stability, Fennessy noted.

Looking ahead, the economic advisory firm expects that the krona will hold onto its recent gains and could appreciate by another 2 percent against the euro in 2025 – as long as there are no unexpected economic shocks.

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PROPERTY

Should you buy a home in Sweden this summer?

Considering the fickle trends in the Swedish housing market, prospective homebuyers might find themselves at a crossroads this summer.

Published: 4 July 2024 14:41 CEST
Should you buy a home in Sweden this summer?

After a period of falling prices driven by increased interest rates, the Swedish housing market is seeing a rebound, particularly in the biggest cities.

However, it’s also taking longer to finalise home sales.

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Recent data from Swedish property listings site Hemnet indicates that while home sales – and housing prices – are on the rise, the time to complete transactions has notably increased.

For instance, the average sale time for an apartment in Sweden increased to 27 days in the first half of the year, up from 22 days during the same period last year. Similarly, houses now take an average of 31 days to sell, compared to 30 days previously.

The slowest market is in the Gävleborg region, where it takes an average of 44 days to sell a home. The fastest transactions occur in Stockholm, with apartments selling in just 16 days and detached homes in 23 days.

This variation in market activity across the country calls for a deeper look into where the best opportunities might lie for homebuyers this summer.

Renewed market confidence in Sweden’s biggest cities

The confidence in the Swedish property market is on its way up in Stockholm, Gothenburg, and Malmö, Erik Holmberg, a market analyst at Hemnet, told The Local.

“I would say that we have seen a weaker market in the last couple of years, almost everywhere in the country, since the Swedish central bank started to increase the interest policy rate, which affected the market a lot,” he said.

“But in the last half of the year or rather in the last year, the confidence has come back in bigger cities – in Stockholm, Gothenburg, Malmö… When we look at price developments last year, in three of Sweden’s biggest cities, we see prices increasing again.”

However, the analyst warned that the opposite is currently true in other areas of the country, which have seen a continued decrease in market activity and flatter developments in the same time interval.

A new trend emerging in Stockholm?

As Hemnet’s analyst explained, in Sweden, housing market trends usually start in Stockholm, when the market begins to change, causing a ripple effect.

“And that’s what we have seen. Now, market activity and prices are increasing again in the bigger cities. Usually, when the market changes, other areas in the country follow, and that could be the case now,” said Holmberg.

“When the rates and inflation situation become clearer, other parts of the country might follow the market in the big cities. Our main scenario is that we will see this spread,” he said, adding that prices in Stockholm have picked up quite fast in the last year but that the demand is still affected by the high interest rates.

“I wouldn’t be surprised if we saw swift price developments in some areas with the highest demand, such as city centres.”

The effect on the rental market

Another aspect to consider is the rental market, which could see significant changes in the short to mid-term.

Holmberg pointed out that properties which fail to sell might enter the rental market.

“What we’ve seen is that it’s harder to sell properties today, so, probably, more people who own homes and can’t sell them will put these unsold homes on the market for a while. This could affect the supply of apartments for rent and, in turn, prices,” the analyst said.

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What different types of homebuyers should know

For buyers, the current market presents a mixed bag.

“In Sweden, we often talk of having a seller’s or buyer’s market. Today, it’s good for buyers that they have a lot to choose from; there’s a record-high supply almost everywhere in the country. That means it’s easy to find something,” said Holmberg.

However, he also cautioned that the slow market makes agreeing on terms with sellers challenging, with sales times at record highs.

“Sales take some time in today’s market, and that’s important to understand for both sellers and buyers, especially for homeowners who are changing homes, meaning they’re both buying and selling something; it’s a tough market for them.

“Today, this group often chooses to sell their home before they buy something new. That makes up a big part of record high sales times; we have people waiting for the right bid before moving from the selling to the buying side…” Holmberg said, noting that the market is different compared to two to three years ago when it was “very hot”.

“So, remember that even if prices grow, it’s still a tough or slow market.”

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On the other hand, first-time buyers might find a silver lining in the form of lower prices compared to a couple of years ago, making it a potentially favourable time to enter the Swedish housing market.

“First-time buyers are in another situation, which may be better because the prices are lower than two years ago, of course, and if you’re just buying something, you don’t need to worry about the selling part,” Holmberg told The Local.

“That’s why this could be a good situation to enter the housing market this summer, but even so, despite supply being really high, it could still be tough because many sellers have put down a listed price but don’t necessarily plan to sell at this price.”

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