Bergström: Monetary policy controls remain in the hands of the Riksbank

Deputy Governor Villy Bergström took part in a panel debate organised by Skånes provinsbank in Helsingborg on Tuesday. Subjects under discussion included the role of the Riksbank following the referendum and current economic developments.

"The result of the referendum was a clear "no" to introducing the euro in Sweden. The Riksbank will therefore continue to conduct monetary policy in the same manner as it has done in the past ten years. There is considerable confidence in both the Riksbank and Swedish monetary policy and therefore no reason to change our monetary policy strategy. The Swedish repo rate will thus continue to be determined on the basis of forecasts of inflation 1-2 years ahead," began Mr Bergström.

"The Riksbank's June Inflation Report painted a somewhat gloomier picture of economic activity, both in Sweden and internationally, than earlier assessments. As a result, the assessment was that resource utilisation in Sweden would decline and that inflation would be well below the Riksbank's target of 2 per cent during the coming 1-2 years. This provided scope to cut the repo rate, which has been cut by a total of 0.75 percentage points over the summer," said Mr Bergström.

"Since the June Inflation Report was completed, there have been clear signs that the recovery in the US economy has gained a foothold. The National Accounts for Q2 show a strong growth in domestic demand in the US and statistics received during the summer indicate that consumption is still strong. Growth in the US is receiving support from economic policy, which remains expansionary. Good productivity growth is also providing support. The improved economic prospects have been reflected in developments in the financial markets since the June report, with rising stock market prices, a halt in the dollar decline and an upturn in long-term interest rates. The latter have also risen as a result of a decline in fears for deflation. However, there is still a question mark over the sustainability of this upturn in economic activity in the US. The ever-weakening public finances could push up long-term interest rates, while the labour market remains weak. In addition, the large budget deficit in the US trade balance could trigger changes in the dollar rate, which could make a recovery in the global economy difficult," said Mr Bergström.

"Although there are indicators that companies in the euro area are beginning to be more optimistic with regard to the future, actual developments have remained fairly poor so far. Growth fell during Q2, and unemployment is at a high level. The weak economic growth makes it difficult for many countries to observe the requirements of the Stability and Growth Pact. Both Germany and France exceeded the minimum deficit of 3 per cent of GDP last year. There is currently a discussion on how to handle this, which may result in fiscal policy restraint and have some effects on growth," said Mr Bergström.

"As far as Sweden is concerned, the repo rate cut and the slightly stronger growth rate during the first half of the year indicate that prospects for economic activity appear much brighter now than they did in June. The National Accounts show that household consumption is the main driving factor behind growth. However, they also indicate that growth in investment remains weak. Furthermore, manufacturing output remains uncertain, demand in the labour market is weak and resource utilisation remains at a low level. Thus, the recent data does not provide a clear-cut picture of economic activity in Sweden, although it can be interpreted as slightly more positive than the outlook in June," said Mr Bergström.

"We will soon face wage negotiations in the labour market to produce new central wage agreements for both private sector and public sector employees at the beginning of next year. Unlike the previous large-scale wage bargaining rounds, which began during the final phase of an economic boom, these rounds will be held during a much weaker economic climate. This should have a restraining effect on wage formation. In addition, the two-year agreement signed by the Municipal Workers' Union in the spring entailing rises of just under 4 per cent for the first year and 2.5 per cent for the second year could be a benchmark for the coming bargaining rounds. Meanwhile, there is tension in the labour market. Blue-collar workers in the industrial sector often have a slower wage development than white-collar workers in the same sector. There may also be demands from other low-wage groups for improved relative wages, and this could be a threat to wage formation. It is difficult to effect relative wage changes in a low-inflation economy, as improvements for one group require that other groups are prepared to have lower wage increases. However, it is still too early to draw any conclusions on the wage bargaining rounds that have major significance for the Riksbank's assessments," pointed out Mr Bergström.

"We on the Executive Board of the Riksbank will not be changing our way of working as a result of the referendum. We will soon produce a new Inflation Report, which will be published in October and there we will once again make an assessment of economic prospects and future inflation in Sweden. Developments so far indicate a slightly brighter picture of economic activity than was presented in the previous Inflation Report. We will have to see what this entails for future inflation," concluded Mr Bergström.

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