Swedish central bank should consider weakening currency

DAVOS: Sweden's central bank should consider steps to weaken the crown to keep the economy competitive after the European Central Bank launched substantial bond-buying on Thursday, former finance minister Anders Borg told Reuters.

Borg, in government until last year and now chair of the Global Financial System Initiative at the World Economic Forum, said the currency was arguably too strong for the good of the economy and the Riksbank had tools to act.

"The krone should for fundamental reasons probably trade somewhat weaker than it is," Borg said in an interview on the sidelines of the WEF's annual meeting in Davos.

He said Stockholm's situation was very different from that of Switzerland, which abandoned an exchange rate cap against the euro last week, sending the Swiss franc soaring, because of market pressure in the run-up to the ECB decision.

Sweden is a member of the 28-nation European Union but voted in a 2003 referendum not to join the now 19-country euro area. Borg said the crown, which floats freely on foreign exchange markets, was primarily a commodity-based currency, due to Sweden's production of iron ore, paper and pulp.

"I should be cautious in commenting on monetary policy, but for Sweden and for the Riksbank, it's more logical now to impact the currency than domestic interest rates, which is difficult when you have over-indebted households," he said. "So if the Riksbank would consider doing further action, I would be supportive of them doing it on the currency side, whether they do it by intervention or with some other tool, that's also quantitative easing," he said.

He said the ECB's decision was arguably overdue and should be front-loaded to have maximum impact on the markets. ECB President Mario Draghi said it would buy 60 billion euros of debt a month until at least September 2016 to revive very low inflation and stimulate the economy.

"My position would be that they should frontload -- faster, bigger, more," Borg said. "You only have one chance to surprise and that should be when you're entering a policy. It's much more difficult to catch up if you're perceived to be too weak."

Asked about a risk of competitive devaluations, he said: "We are definitely in a period when currency turmoil is returning in a way we didn't see in the last six or seven years of crisis. It was the dog that didn't bark."