Sweden's central bank raised its key interest rate by 50 basis points to 3.50% as expected. Analysts at Wells Fargo point out that the Riksbank faces something of a dilemma in that while inflation has been extremely rapid, economic activity has been particularly weak. They see the potential for the Swedish Krona to soften versus the Euro over the medium term.

Key quotes: 

“We believe the Riksbank will, despite elevated inflation, take a cautious approach to further rate hikes. To be sure, after this week's announcement, we do expect some further monetary tightening. However, much like the Riksbank, we expect that tightening to be modest, and see just one final 25 bps rate increase in June to 3.75%.”

“This cautious approach to monetary tightening, which will leave real policy interest rates still deeply in negative territory, along with the underwhelming performance of the economy, means we are also turning less constructive on the Swedish krona.”

“We now see potential for the Swedish krona to soften versus the euro over the medium-term, targeting a EUR/SEK exchange rate of SEK11.5500 by end-2023 and SEK11.7000 by Q3-2024. Given our outlook for euro strength versus the U.S. dollar, that should still equate to modest krona strength versus the greenback over time. We target a USD/SEK exchange rate of SEK10.1325 by end-2023 and SEK9.7500 by Q3-2024.”