Repo rate held unchanged at 4.0 per cent

At the meeting on Wednesday, 30 May, the Executive Board of the Riksbank decided to leave the repo rate unchanged at 4.0 per cent, to apply from 6 June. The decision is based on the Riksbank's Inflation Report.

The overall assessment in the Report is that inflation one to two years from now will be approximately in line with the Riksbank's target.

In the March Inflation Report a relatively large revision of the international growth forecast was considered to entail a slackening of economic activity and inflationary pressure in Sweden. In the main scenario in the present Report the prospects in the OECD area are essentially the same as in March. In Sweden, the outlook for real disposable income and wealth is somewhat more subdued, which also means that this year's slowdown in the growth of consumption is somewhat more distinct. Some downward adjustment of the investment forecast for 2001 is also called for. As regards the forecast period as a whole, the assessment is broadly unchanged. The Riksbank counts on a GDP growth rate of 2.2 per cent this year, followed by 2.5 and 2.9 per cent, respectively, in 2002 and 2003.

The assessment of resource utilisation is also largely the same as in the March Report. Total capacity utilisation is still high and will remain so during the forecast period.

Price increases since the time of the March Report have been larger than anticipated, in Sweden as well as in most other industrialised countries. A common feature of the upward price trend is the price increases for energy and certain food products. In Sweden, moreover, the earlier downward effect on inflation from the deregulation of energy and telecom markets, for example, will no longer tend to subdue the price rise.

To a considerable extent, the deviations from the forecasts have to do with price movements of a rather temporary nature. Meat prices have been affected by BSE and foot-and-mouth disease. Electricity prices have risen sharply on account of, for example, changes in the methods for price measurements and the unusually low snowfall this winter. Petrol prices have risen in connection with production problems at refineries. Supply shocks of this kind do not normally have a permanent effect on the price trend.

In the main scenario the rate of inflation is close to 3 per cent initially. It then falls back and at the end of the forecast period is more in line with the target. To a large extent, the downward shift in the rate of price increases occurs because the recent rapid price increases for a number of goods and services drop out of the 12-month change figures for the CPI as well as UND1X. A stronger exchange rate and falling petrol prices contribute to this tendency, while the rising resource utilisation in the latter part of the period acts in the opposite direction. All in all, the rate of both CPI and UND1X inflation one year ahead is judged to be 1.8 per cent. The corresponding forecasts two years ahead are 2.2 per cent for the CPI and 2.1 per cent for UND1X.

The risk spectrum also influences the formation of monetary policy. Lower inflation than in the main scenario is indicated mainly by the persistently large risk of a poorer international development. There continues to be uncertainty about the depth and duration of the economic slowdown in the United States. Higher inflation is suggested by the risk of the exchange rate remaining weak. The higher outcome figures for inflation are judged to have increased the uncertainty about resource utilisation and its impact on inflation. The risk spectrum is balanced at the same time as the uncertainty about inflation's future path is unusually great.

It is concluded that, even with the risk spectrum taken into account and given an unchanged repo rate of 4 per cent, inflation one to two years ahead will be approximately in line with the Riksbank's target. That makes it natural to leave the repo rate unchanged.

A press conference at the Riksbank will be held at 10 a.m., entry by press card at 11 Brunkebergstorg. The press conference will be attended by First Deputy Governor Lars Heikensten, Claes Berg, head of the Monetary Policy Department, and Hans Lindblad, head of the department's Division for Macro Economic Analysis. The minutes of the Executive Board's monetary policy discussion at yesterday's meeting will be published on 14 June.

The Inflation Report can be downloaded from the website under the heading: Publications/Inflation Report, or ordered from Information Riksbank, e-post: forradet@riksbank.se, fax: +46 8 787 05 26, telephone: +46 8 787 01 00.