An analysis by Viktor Munkhammar in one of the Swedish financial newspapers, Dagens Industri, gave some thought to just that. Below is a brief summary of his analysis.
"Swedish long-term interest rates are among the lowest in the Western world. The low supply is probably the main reason, rather than the growth and inflation outlook diverging. Somewhat paradoxically, weaker government finances, via higher market interest rates, could be a way to strengthen the krona.
When inflation skyrocketed last year, the interest rate on Swedish 10-year government bonds rose from 0% to 2.4%.This year these bonds has been in the 1.9-2.8% range.Currently, these so-called benchmark bonds are traded at just over 2.6%.It is remarkable that investors in a situation where CPI inflation is closer to 10% do not require more than that to lend money over a 10-year period.
One observation is that there can be a strong belief that the period of high inflation is temporary because otherwise you lock in large losses at such a low interest rate.
Another reflection could be that it is considered that the interest rate is not in phase with the expectations on the Swedish financial market, that is to say that the concern for a possible financial crisis on the Swedish real estate market is exaggerated.
Yet another thing to note is that Swedish long-term interest rates are lower compared to similar countries, they are even equal to Germany, which is Europe's economic anchor.
There are several theories as to why Sweden has a higher inflation rate than the countries used in the comparison, apart from the UK, such low borrowing costs. The main explanation that several both analysts and economists endorse is a "material shortage", aka known as the law of supply and demand. In this case a low supply of Swedish government securities equals a higher price.
The reason for this low supply is that the Swedish central bank has just started to sell off its holdings of Swedish government securities, which amount to just over $25 billion. The decision to sell was made in February 2023 and the reason is to normalize the balance sheet according to Swedish central bank governor Erik Thedéen.
The Swedish central bank intends to accelerate the pace of sales. However, this will probably only affect market interest rates marginally as the amounts are too small.
The solution can be found at the Ministry of Finance. Since the outbreak of the pandemic, government finances have developed better than expected, and for the first time since May 1992, Sweden's national debt was lower than $85 billion.
The so-called Maastrich debt, where the public sector's total debts are added together, amounts to 30%, which is half of Germany's. This provides a large scope for increased indebtedness, which in turn results in an increased supply of government bonds. Such a procedure would be directly inappropriate and also completely contrary to the fiscal policy framework which contains a debt anchor of 35% of GDP. With inflation being one of the finance minister's bigger concerns right now, she will most certainly hold back as long as prices continue to rise too quickly.
It is still uncertain when inflation will moderate but hopefully in the near future. Then there would be room for a more aggressive fiscal policy. Paradoxically, such a measure could possibly strengthen the Swedish krona. Higher interest rates provide a better return on Swedish assets and a greater range of Swedish government securities provides better liquidity. That such a procedure weakens the government's finances and thereby results in a stronger currency goes against most economic models and intuition."
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