Bergström: Continued confidence in the Riksbank

Deputy Governor Villy Bergström participated today in a debate in Laholm, Sweden where he spoke about the implications of the referendum result for the future and also discussed the Inflation Report that was published yesterday.

"The Sveriges Riksbank Act from 1999 states that the Riksbank's objective is to maintain price stability. We have defined this more explicitly in our inflation target: that the annual rate of change in consumer prices shall be 2 per cent, with a tolerance for deviations of ± -1 percentage point. The Act also states that the tasks of monetary policy shall be discharged by an independent Executive Board, which many have questioned from a democratic perspective. We have tried to overcome the opposition to an independent Riksbank that has existed in different areas of society and the Swedish parliament by means of transparency and clarity in our conduct of monetary policy. In practice, this means that we present regular assessments of economic activity and inflation, give speeches and other talks, and publish the minutes of our monetary policy meetings. For the Riksbank, the result of the referendum means that monetary policy will be conducted as before. Swedish inflation prospects will continue to be the focus of monetary policy, and our inflation target will continue to apply. The Riksbank's experiences of inflation targeting have been positive, and there is therefore no reason to change our monetary policy strategy as a result of the referendum outcome. Instead, we can interpret this partly as a sign that we have succeeded in mustering the support of the public in our operations and that there is confidence in the Riksbank's monetary policy," said Mr Bergström.

"Over the past year inflation in Sweden has largely been determined by supply shocks in the form of high energy prices. During the coming months energy prices are expected to remain at a higher level than forecast by the Riksbank in June. As a result, energy prices over the coming year are not anticipated to subdue inflation as much as forecast in previous estimates, and some of the dampening effect will be delayed," said Mr Bergström.

"The Riksbank judges that total activity in the world economy strengthened slightly over the summer. However, there has been little change compared with the assessment presented by the Riksbank in June, and the outlook is mixed. For example, economic prospects remain gloomy in Europe, where several countries witnessed a decline in GDP during the second quarter. In the United States, however, it appears that expansionary economic policy has had an impact and an economic revival taken root. This can be seen in the financial markets, where equity prices and long yields have been rising. It is also reflected in a continued high level of consumption and an incipient recovery in business investment," observed Mr Bergström.

"A turnaround in the US labour market is a precondition for a sustainable upswing there. US firms have so far been cautious with recruitment, and demand in the labour market is currently weak. Recent data, however, point to a possible turnaround. In September the number of employed rose for the first time in eight months, and 57, 000 new jobs were created. Meanwhile, the number of job cutbacks in manufacturing fell. Unemployment remains at 6.1 per cent, however. The positive data could be interpreted as a sign of US firms' increasing belief that demand is now sufficiently robust to begin recruiting more staff," said Mr Bergström.

"Swedish GDP growth during the first half of this year was somewhat stronger than forecast in June. Together with the repo rate cuts of 0.75 percentage points in total, this makes for a slightly brighter outlook for the Swedish economy than before. In the labour market, however, conditions are still weak. Employment in the public sector has started to decline, and there are no signs of a pronounced recovery in industry. Wage formation is the single most important factor for inflation in Sweden. In the coming years, labour market conditions are judged to restrain wage inflation. However, the risks of higher inflation associated with next year's wage bargaining round are expected to remain, although they have subsided since the Municipal Workers' Union signed an agreement that entailed lower wage increases than feared," said Mr Bergström.

"The outlook presented for the Swedish economy in the Inflation Report assumes somewhat higher resource utilisation during the forecast period compared with the June forecast. The moderating effect from energy prices has been delayed, however, and the forecast for UND1X inflation is thus largely unchanged compared with June. Inflation adjusted for energy prices is expected to be somewhat higher towards the end of the forecast period compared with previous forecasts and is therefore in line with our target," concluded Mr Bergström.