Repo rate unchanged at 3.75 per cent
At the meeting on Wednesday, 9 October, the Executive Board of the Riksbank decided to leave the repo rate unchanged at 3.75 per cent, with effect from 11 October. The decision is based on inflation prospects as assessed in the Inflation Report that is published today.
Monetary policy is currently formulated on the basis of an assessment of inflation excluding transitory effects from indirect taxes, subsidies and house mortgage interest expenditure (UND1X). In the main scenario in the Inflation Report, UND1X inflation with an unchanged repo rate of 3.75 per cent is judged to be 1.5 per cent one year ahead and 1.9 per cent after two years. When various alternative paths are taken into account — above all the risks of a higher oil price, a weaker exchange rate and more rapid wage increases — the rates of inflation are judged to be somewhat higher, namely 1.6 and 2.1 per cent, respectively.
The inflation assessment starts from a continuation of strong international economic activity. Together with rising consumption and a favourable development of investment, this provides conditions for further rapid growth in Sweden, too. GDP growth in the main scenario is forecast to be 4 per cent this year, 3.7 per cent in 2001 and 3 per cent in 2002. Compared with the June Report, only minor revisions have been made to GDP growth in Sweden up to 2002. Neither has the inflation forecast been altered more than marginally. That future inflation is not higher, even though the economic upswing is continuing and the forecast horizon has been shifted ahead, is partly a consequence of the amount of unutilised resources now being considered to be somewhat larger. Wage increases are judged to be somewhat lower, accompanied by marginally higher productivity growth. In the short run, however, inflation is expected to be somewhat higher than forecast in June, mainly because the oil price is higher and the exchange rate somewhat weaker.
While the oil price and exchange rate assessments have been revised in the light of developments in the summer and early autumn, the forecast of inflation one to two years ahead still counts on a successive appreciation of the krona and a gradual fall in the price of oil. However, the uncertainty is considerable. A higher oil price and a weaker exchange rate could lead to inflation rising more rapidly than assumed in the main scenario.
The assumption of a somewhat lower rate of wage increases is supported by, for example, wage outcomes to date this year as well as inflation expectations that are relatively low and stable. Still, there is considered to be some risk, albeit relatively small, of a development of wages that is considerably stronger, for example as a result of negotiators’ demands for parity and compensation. Together with confidence in the low-inflation policy, the situation in the labour market and the coming wage negotiations will be of crucial importance for the future formation of monetary policy.
The present decision to leave the repo rate unchanged for yet another while is to be seen in the light of the assessment that for virtually the whole of the time horizon the Riksbank currently appraises, inflation is forecast to be below 2 per cent. When various alternative paths are incorporated in the assessment, however, inflation two years ahead is marginally above the target. The picture of a strong upswing in the Swedish economy still holds, with rising resource utilisation in the labour market, for example. That suggests that the repo rate may need to be raised in the future.
The minutes of the Executive Board’s monetary policy discussion at yesterday’s meeting will be published on 24 October.
Governor Urban Bäckström is to address the Parliamentary Standing Committee on Finance at 9 a.m. today in Skandiasalen, 1 Mynttorget.
A press seminar at the Riksbank will be held at 1 p.m., entry by press card at 11 Brunkebergstorg. It will be attended by First Deputy Governor Lars Heikensten, Claes Berg and Per Jansson, head and deputy head, respectively, of the Monetary Policy Department, and Hans Lindblad, head of the department’s Division for Macro Economic Analysis. The seminar will also be transmitted (in Swedish) on the Riksbank’s website,
www.riksbank.se, under the heading ‘För journalister/Video’.
The Inflation Report can be downloaded from the website under the heading Publications/Inflation Report or ordered from Information Riksbank, e-mail address:
, fax: +46 8 787 05 26, telephone: +46 8 787 01 00. [email protected]