Heikensten: Present inflation prospects good
Speaking at the Fastighetsvärlden Conference in Stockholm today, First Deputy Governor Lars Heikensten considered some issues that impinge on monetary policy.
He began by commenting on the good economic situation:
‘Things are going well for Sweden’s economy. Growth has been high for a number of years and employment is now rising at the same time as inflation is low and government finances are strong. In accordance with this, the Swedish krona has been stable and market interest rates have decreased. This is not happenstance — it has to do with the realignment of economic policy in the early 1990s, with the focus on price stability, budget consolidation and measures for improving the workings of the economy and its growth potential.
‘Certain features of the current debate are reminiscent of the late 1980s and suggest that memories are short. Increased public spending and shorter working hours, for example, are now being demanded even though we know that the public finances will soon have to cope with major challenges on account of an ageing population coupled with increasing difficulties in maintaining the present tax take.’
Lars Heikensten also touched on inflation prospects:
‘The view of monetary policy and inflation in the public debate is highly changeable. Last autumn many people were worried that the Riksbank’s inflation assessment was unduly optimistic. At present, even our assessment is turning out to have been on the high side, not least as regards domestic inflationary pressure. Once again, however, it should be underscored that one should not make too much of just one or two monthly inflation figures.
‘Personally I can see a case for making some revisions to the picture of inflation we presented in March. On the one hand I do not believe that growth will automatically slacken quite as clearly in 2001 and 2002 as we counted on, at least as long as the direction of stabilisation policy is expansionary. On the other hand I do believe that somewhat better productivity growth may be feasible. Together with some changes in tax and expenditure systems, that could counter the inflationary effects of somewhat stronger growth and the fact that we have moved a little further along the business cycle.’
In conclusion, Lars Heikensten presented his view of the current monetary stance:
‘Thus, the present picture of inflation is good. But I want to underscore that growth remains strong, which means that bit by bit the unutilised resources will be brought into production. There are therefore grounds for expecting — unless there is a clear change in the economic perspective — that domestic inflationary pressure will increase even though inflation may continue to be low in the short run.
‘One risk in the economic picture lies in wage formation, even though at present there is no indication of a wage outcome for 2001 and 2002 that differs from the Executive Board’s assessment in March. Another risk concerns price trends in asset markets, in that in time they may lead to economic imbalances which, when a correction comes, can have negative consequences for growth and employment.
‘Although inflation prospects seem to be better, in my view there is reason to count on a need for further interest rate hikes. The rate at which they may be introduced has become more uncertain. That depends, as always, on our ongoing appraisal of inflation.’