Sweden's Economic Resilience Amid Inflation Concerns and Peso Depreciation

Key Takeaway

• Riksbank Deputy Governor Aino Bunge calls for reforms to reduce household and property sector sensitivity to economic changes, highlighting Sweden's resilience amid inflation.
• The Philippine peso fell 0.4% to 58.29 per dollar, prompting modest BSP intervention; potential rate cuts of up to 50 basis points are considered.
• Hawkish FOMC minutes suggest prolonged elevated US interest rates, impacting Asian currencies and central bank policies in the region.

Sweden's Economic Resilience

Sweden has managed to navigate through a challenging period of inflation without succumbing to a more severe economic downturn, according to Riksbank Deputy Governor Aino Bunge. Speaking at a commercial real estate seminar in Stockholm, Bunge emphasized the need for measures to reduce the sensitivity of households and property companies to higher interest rates and other economic changes. She highlighted the importance of ensuring that all sectors of the economy can withstand faster price increases and higher interest rates to avoid future problems.

“There must be conditions for monetary policy to do the job for which it has been given responsibility, without problems arising in some parts of the economy – and in the worst case in the financial system – as a result of behavior that is too short-term and too risky,” Bunge stated. She noted that Sweden's housing and commercial property markets have shown particular vulnerability and called for greater transparency in how property companies value their assets.

Bunge also pointed out that inflation targeting has been effective, as Sweden's economy has avoided an "excessive slowdown" and financial stability issues. "The development of the real economy could have been much worse," she said, adding that the trend of increased indebtedness in some sectors, including the property sector, could have led to more severe problems if it had continued for several years before inflation rose.

Peso Depreciation Concerns

The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), is actively managing speculation in the foreign-exchange market as the peso nears a record low. Governor Eli Remolona disclosed that the BSP intervened in the market on Tuesday in small amounts. The peso fell by 0.4% to 58.29 per dollar on Thursday, approaching its record-low level of 59 reached in 2022. “In situations in which the peso depreciates, there’s a tendency for stress; the dealers, the traders, they tend to offer big amounts when they’re trying to sell the peso,” Remolona said. “Sometimes the price fluctuates more than before, so we try to control that.”

The peso has declined by 3.5% this quarter, making it the worst performer among emerging markets after the Argentine peso. Remolona mentioned that the BSP is not intervening in the foreign-exchange market daily and that any intervention is "very modest." He emphasized, “We want those who really need dollars to get the dollars at reasonable prices.” The central bank is considering cutting its key interest rate by as much as 50 basis points this year, with the first cut potentially occurring in the third quarter and another in the subsequent quarter, depending on the data.

Hawkish FOMC Minutes

Asian currencies, including the Philippine peso, are expected to face challenges following the release of the Federal Open Market Committee (FOMC) minutes, which revealed a more hawkish stance than previously communicated by Fed Chair Jerome Powell. The minutes indicated that some officials are concerned that current interest rates might not be restrictive enough to curb inflation. This contrasts with Powell's earlier comments suggesting that the next move could be a rate cut rather than a hike. The prevailing sentiment from the minutes is that interest rates will remain elevated for an extended period, which has strengthened the US dollar.

The Federal Reserve's decision to hold rates steady has significant implications for regional central banks in Asia. For instance, the Bank of Korea is anticipated to maintain its current rates, but it is unlikely to signal the start of an easing cycle without more clarity on the Fed's future actions. Similarly, Bank Indonesia recently decided to keep rates steady, adopting a data-dependent approach moving forward.

Street Views

• Aino Bunge, Riksbank Deputy Governor (Cautiously Optimistic on Sweden's economy):

  "There must be conditions for monetary policy to do the job for which it has been given responsibility, without problems arising in some parts of the economy – and in the worst case in the financial system – as a result of behavior that is too short-term and too risky."
  "The development of the real economy could have been much worse. Especially if the trend we saw of increased indebtedness in some sectors, including the property sector, had continued for a number of years before inflation rose."