Exchange rates to diverge as Swedish krona rises

Prospects for the Nordic economies and Switzerland are strong, but there are divergent outlooks for monetary policy. In Sweden, inflation is already close to the Riksbank’s target and, with capacity constraints starting to bite, inflationary pressures are growing. We therefore think that the Riksbank will raise interest rates in September and tighten policy faster than investors currently expect in 2019, causing the Swedish krona to appreciate against the euro. While the Norges Bank has signalled that it might be willing to raise rates before inflation returns to target, we doubt that it will tighten policy until the second half of 2019. Even then, we expect it to raise rates very gradually. In Switzerland, the recent pick-up in inflation has been due to exchange rate effects which look set fade. As inflation is likely to remain very low, we think that the SNB will keep policy unchanged until 2020. For these reasons, we expect the Norwegian krone and Swiss franc to weaken against the euro.