FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the Sweden’s Riksbank yesterday sharpened its sword in the latest round of currency wars. Key Quotes “The Riksbank announced that the Governor together with the First Deputy Governor will now be able to take the decision to instantly intervene in the currency market if it deems it necessary. Previously, a board meeting would have to be convened in order to decide on intervention. In its statement the Riksbank stresses that “since the last monetary policy meeting in mid-December, the Swedish krona has appreciated against most other currencies”. With respect to usual monetary policy measures, the Riksbank could be running out of road. This is partly because the Riksbank’s repo rate is already well below zero at -0.35%, partly due to the fact that it has already purchased large amounts of government bonds in a programme that its already scheduled to run into 2016 and partly because the very low interest rate environment is fuelling household debt which is enhancing the vulnerabilities of the economy. If the Riksbank were to lower the repo rate further, it would risk adding fuel to the fire. As the ratio of household debt to income rises, the economy becomes increasingly vulnerable to any economic slowdown, though robust banking sector does offer protection. Even though the Riksbank is struggling to boost headline inflation, its policy measures have offered some lift to core inflation. Although headline inflation at 0.1% y/y is very slack, core inflation at 1.0% y/y is a little more robust. Clearly, though this level of inflation is acutely disappointing given the hugely accommodative monetary policy settings. Last month the ECB extended its QE policy. Speculation that the Riksbank could intervene in the FX market around the EUR/SEK 9.00-9.10 level is likely to lend support at least in the short term. However, on any extended bout of EUR weakness the Riksbank will have to show the market the colour of its money in order to maintain its credibility. That said there is risk that playing the intervention game will mean that its balance sheet may start to become EUR top heavy. This will be workable in the short to medium-term, but is not a long term policy solution. The Riksbank, like the other smaller European Central Banks will be hoping for reflation in the Eurozone to relieve them of their policy pressures. Today’s weaker than expected print of Eurozone December CPI inflation at 0.2% y/y will be as much a concern to Europe’s other central banks as it is to the ECB. If weak EZ inflation data raises the risk of an extension of easing from the ECB, it also increases the odds that the Riksbank will be forced to intervene.” For more information, read our latest forex news.