Heikensten: Monetary policy and the economic situation
At a meeting arranged by Edsbyns IF Bandy(a bandy sports association) and municipality of Ovanåker, First Deputy Governor Lars Heikensten spoke about monetary policy and the economic situation.
"In the light of the most recent statistics it was natural that the Executive Board meeting on February 1 left the repo rate unchanged. Today, inflation prospects seem to be favourable. It looks as though the inflation target can be fulfilled in the coming years. Among other things, this is due to the Riksbank’s interest rate increase in December and weaker international economic activity," Mr. Heikensten said.
Developments in the United States are crucial
"The future path of economic activity will be determined by developments in the United States. Conditions for a quick recovery exist. That is also what most financial market observers, not least in the United States, seem to believe at present. But the U.S. economy does present clear imbalances, including a record overhaul saving deficit. It has to be asked what will happen to this in the event of a kick-start to the American economy. Another question is whether the good productivity performance in the United States will continue when activity shows signs of faltering. The upward phase in the American economy has lasted an unusually long time," Mr. Heikensten said. "Coming to terms with the problems calls for a long period of adjustment."
The Swedish economy is affected but remains stable
"In Sweden the economic situation still looks stable, with sound government finances, good growth and low inflation," Mr. Heikensten continued. "But of course the international developments have affected us and will probably continue to do so in the coming months. The development of exports is now tending to hold manufacturing output back, which presumably will affect industrial investment. Contrary forces are at work, however. Private consumption is still growing steadily, supported by rising employment and a favourable income trend. Moreover, residential investment is expanding and growth in the services industries generally continues to be strong," Mr. Heikensten said.
"The high economic growth Sweden has had in recent years needs to be adjusted to a more sustainable rate in order to ensure that inflation remains low. It now looks as though this adjustment is occurring. So at present there is no need for further monetary policy measures. But is what we see today the desired soft landing or will activity become stronger again or slacken more than is desirable? We are watching that closely and will return to the issue in connection with the Inflation Report in March."
Wage developments affect the room to manoeuvre
"It is not just the path of economic activity that affects inflation. The development of wages will be of decisive importance for monetary policy," Mr. Heikensten said. "The agreements concluded to date are relatively well in line with the Riksbank’s earlier forecasts but given reasonable assumptions about wage drift, in a longer perspective they appear to be somewhat on the high side. Neither have settlements yet been reached for large segments of the labour market, including the public sector and distributive trades. Unduly large wage outcomes are a heavy blow to employment, particularly if economic activity weakens more than expected," Mr. Heikensten concluded.
