Repo rate left unchanged at 3.75 per cent

At the meeting on Wednesday, 22 March, the Executive Board of the Riksbank decided to hold the repo rate unchanged at 3.75 per cent, to apply from Wednesday, 29 March. The decision is based on the analysis of inflation prospects in the Inflation Report that is being published today.


The conclusion in the Inflation Report is that inflation adjusted for transitory effects from indirect taxes, subsidies and house mortgage interest expenditure (UND1X) will be somewhat below 2 per cent one year ahead and marginally above the inflation target after two years.


International economic prospects have continued to improve since the time of the December Inflation Report. The oil price is now expected to be higher and the krona to appreciate somewhat slower than foreseen in that Report. Economic growth in Sweden is also expected to be stronger than allowed for in the previous Report. It is primarily growth prospects for private consumption that have improved, for instance in connection with rising asset prices and increased household wealth. All in all, GDP growth is judged to be 4.0 per cent this year, 3.5 per cent in 2001 and 2.6 per cent in 2002. The comparatively rapid expansion of total demand suggests that the unutilised resources at present will be brought into production in the coming two years.


Compared with the December assessment, a downward effect on forecast inflation comes from a somewhat different picture of unit labour costs. This has to do with a somewhat better outlook for productivity growth in the light of, for example, the outcome for the second half of 1999. The prospect of a marginally lower wage rise also contributes.


The beginning of a major round of wage negotiations makes the wage trend difficult to forecast. Rising resource utilisation is likely to lead to somewhat higher wage increases in the coming years but structural innovations in wage settlements and other institutional changes are judged to act as a damper. The overall nominal wage rise in the coming years is calculated to be just over 4 per cent.


Expectations of inflation in the short run have gone on rising and are now broadly in line with the target. This is accompanied by expectations for the longer run that have stayed around 2 per cent.


With successively rising activity, underlying domestic inflation (UNDINHX) is expected to increase in the forecast period. At the same time, inflation is being held back by low price increases for imports. Notwithstanding a higher oil price and a somewhat weaker exchange rate, the import component of consumer prices will continue to rise slowly, partly as a result of increased domestic competition. With an unchanged repo rate, in the main scenario the rate of UND1X inflation is foreseen to be 1.6 per cent one year ahead and 2.1 per cent after two years. The risk spectrum is judged to be balanced, which means that the inflation forecast in the main scenario is the same as the forecast adjusted for risks.


To sum up, the strong economic activity and gradually growing inflationary pressure point to a future need for further repo rate increases. The timing and size of the increase are considered in the light of, for example, new information and its significance for the Riksbank’s overall inflation assessment. The current assessment is that in the greater part of the coming one to two years, inflation is expected to be below 2 per cent. This speaks in favour of leaving the repo rate unchanged for now.


Governor Urban Bäckström is addressing the Parliamentary Standing Committee on Finance at 9 a.m. today in Skandiasalen, 1 Mynttorget.


A press seminar with First Deputy Governor Lars Heikensten, Claes Berg, Per Jansson and Hans Lindblad, will be held at 2 p.m. at the Riksbank; admission by press card at 7 Malmskillnadsgatan. The seminar will also be accessible on the Riksbank’s website.

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