Nyberg: Weak economic developments affect inflation prospects
Deputy Governor Lars Nyberg gave a speech on Friday at Nordea Fixed Income seminar in Copenhagen. The speech included a description of developments since the March Inflation Report, which had on the whole been slightly weaker than expected.
"The war in Iraq is over and the rebuilding phase has begun. It was a short-lived war, in line with the assessment made by the Riksbank in the March Inflation Report. Oil prices have fallen more quickly than expected and are presently at historically more normal levels. The risk of prolonged high oil prices contributing to greater inflationary pressure has thus declined," said Mr Nyberg.
"In the aftermath of the war there have been adjustments on the financial markets and various risk measures indicate that uncertainty has declined. This was expected. However, there are few signs that this has had a positive effect on real demand. Data received regarding employment and household incomes indicates that growth in the USA could be slightly more subdued this year than was assumed in the main scenario of the Inflation Report. In the euro area, too, developments on the labour market, poorer international conditions and fiscal policy restraint all indicate a slightly slower recovery. This is also confirmed by preliminary figures for Q1 GDP in many euro countries. It was assumed in the Inflation Report that the Swedish economy would grow by 1.7 per cent in 2003 and by 2.4 per cent in 2004 and 2005. Weaker international developments and the weak investment trend at the end of last year indicate a slightly slower recovery in the Swedish economy than was assumed in the March Inflation Report. This is despite the fact that the Riksbank lowered its repo rate in March. Somewhat tighter fiscal policy will also contribute in this regard," said Mr Nyberg.
"If we look at inflation, the Riksbank's assessment, since rising electricity prices pushed up inflation at the beginning of the year, has been that the increase is temporary and that inflation would gradually return to the target level of 2 per cent. Developments so far have been roughly in line with the Riksbank's assessment. The most recent inflation figures from April could be interpreted as the decline being more rapid than expected. If this sequence of events continues, the risk of higher electricity prices spreading to other sectors of the economy will also decline. If the outcome of the present strike leads to higher wage demands in other areas of the labour market, this could of course prove to be a problem. However, monetary policy will be able to manage this at a later stage," pointed out Mr Nyberg.
"Information received since the meeting at the end of April indicates, in my opinion, that the international downside risks are still slightly greater than the domestic upside risks. In addition, demand is weaker both in Sweden and abroad and price pressure is subdued. I therefore consider there is certainly scope for more expansionary monetary policy," concluded Mr Nyberg.