Bäckström: Very alert to international economic tendencies
Addressing the Halmstad section of the Swedish Shareholders’ Association at a seminar at Tylösand Hotel, Riksbank Governor Urban Bäckström spoke about current monetary policy issues.
"With the Riksbank’s interest rate increase and an international economic slowdown, it now looks as though the Swedish economy is entering a calmer phase. That need not be a bad thing. On the contrary, a strong upward phase such as we have experienced in recent years is liable to lead in time to imbalances that jeopardise a continuation of stable growth. When resource utilisation rises too quickly and becomes excessively strained, there is a risk that tensions between demand and what the economy can actually supply will increase. That can lead to an acceleration of price and wage increases and ultimately to a serious economic downturn. So the December repo rate increase of 0.25 percentage points, to 4 per cent, and more subdued international economic activity can contribute to future economic growth in Sweden that is more sustainable. That improves the conditions for lasting stable growth, good employment and low inflation," Mr. Bäckström said.
"Taking my cue from being in Tylösand, close to the sea, let me put it this way: When your ship moves into waters where there may be rocks and shallows, it is advisable not to have all sails set but to take in one or two so that it is easier to navigate past the dangers. The aim, after all, is to continue a stable voyage. This is all the more important when the boat is rather cumbersome to steer and adjustments to the course and speed take time. Once past the rocks, the speed can be adapted once more to the prevailing conditions," Mr. Bäckström said. "If the wind gets up, the sails simply have to reefed to ensure a pleasant voyage. If the wind drops, on the other hand, perhaps the ship can take on more sail," he said.
"The risks we saw in December as a possible source of rising inflation are no longer so apparent. It should be borne in mind, however, that the current round of wage negotiations has not been completed and the outcome is highly relevant for the path of inflation. The effect of the exchange rate on inflation prospects also has to be considered.
‘The question we and many others are asking is how marked the slowdown in the United States will be and how it will affect the Swedish economy. The imbalances in the American economy could involve a risk of the slowdown being more pronounced and protracted than would otherwise have been the case. At the same time, the Federal Reserve has displayed a high state of readiness to ward off a troublesome decline," Mr. Bäckström said.
"All this makes it important to keep a close eye on developments. And that is precisely what we are doing at the Riksbank as we start work on the next Inflation Report, which will be presented in just over a month’s time, on 27 March," Mr. Bäckström concluded.