Repo rate raised 0.25 percentage points to 4.25 per cent
At the meeting on Thursday, 5 July, the Executive Board of the Riksbank decided to raise the repo rate 0.25 percentage points, from 4 to 4.25 per cent. The decision, which applies from Wednesday, 11 July, is to be seen against the background of the information that has become available since the most recent Inflation Report.
The risk of inflation exceeding the Riksbank’s 2 per cent target 1–2 years from now is judged to have become somewhat greater. This mainly has to do with resource utilisation remaining high, despite the ongoing slowdown, and the Swedish krona’s low value. Another consideration is substantial price increases during the past quarter; even though they are judged to be mainly transitory, there is a risk of them affecting inflation expectations.
In the main scenario in the Inflation Report in May, it was foreseen that the path of inflation would be approximately in line with the 2 per cent target. The effects on inflation of supply shocks that contributed to rapidly rising prices during the spring were judged to diminish and not affect inflation permanently. GDP growth was expected to be 2.2 per cent this year and then pick up to 2.5 per cent in 2002 and 2.9 per cent in 2003. Total resource utilisation was judged to be high and to remain broadly unchanged during the forecast period. That in turn meant that inflation — after the transitory effects of increased prices for petroleum products and food products, for example, had subsided — would gradually move up to and somewhat exceed the targeted level. The weakening of the Swedish krona was not expected to last, although the exchange rate was assumed to appreciate to a weaker level than foreseen in the March Report. The risk spectrum was balanced, while the degree of uncertainty was judged to be considerable.
Since the publication of the Inflation Report in May, the international outlook has become somewhat weaker. There are signs of growth being lower this year, above all in Japan but also in the euro area. Prospects for the United States are still judged to result in a gradual recovery that spreads to other countries. Still, the uncertainty about the picture of international economic activity remains very considerable.
In Sweden, too, the recent statistics suggest that growth this year is slackening somewhat more than expected earlier. Moreover, the picture of the coming years is not clear-cut. Industrial activity has admittedly weakened during the spring but there are signs that the inflow of orders, for example, may have started to stabilise. Meanwhile, domestic demand is still comparatively strong as a result of, for instance, a number of years with a low level of interest rates and a fiscal stance that is slightly expansionary. Inflation has approximately followed the assessment in the Inflation Report.
The risk spectrum for inflation has changed to some extent since the Inflation Report. This mainly has to do with the krona’s depreciation from a level that was already low. There are still grounds for counting on a future appreciation of the krona but the weaker initial position makes it more difficult to count on an imminent appreciation to the level that was incorporated in the Riksbank’s earlier assessment. A more permanently weak exchange rate would have consequences for inflation. That applies in particular when resource utilisation is high. In this situation it is particularly important that the supply-related, more transitory price increases do not affect the picture of prices in other areas, too, and that the expected rate of inflation in the years ahead remains low.
Against the background of the weak krona and because the exchange rate is an important factor in the assessment of inflation, on a number of occasions since 15 June the Riksbank has intervened in the currency market. Such interventions are one of the instruments at the Riksbank‘s disposal. There is reason to underscore that in the Riksbank’s formation of monetary policy, the part played by the krona is the same as before. It is still the comprehensive assessment of inflation, in the first place 1–2 years ahead, that directs the formation of policy.
In this context there may be reason to underscore that the Swedish economy is fundamentally strong, with good conditions for growth and employment together with surpluses on the current account and the public finances. The high inflation recently in conjunction with an economic slowdown is a problem that Sweden shares with a number of other countries around the world. There are some differences, however, such as the weak exchange rate and an instrumental rate that has been low for longer.
All in all, then, the Executive Board’s decision to raise the interest rate is motivated by a minor shift in the Riksbank’s appraisal of future inflation. It has been considered important in the current situation to send a clear signal that the inflation target is taken with the utmost seriousness.
The decision does not represent a position about the repo rate’s future path. As usual, that is something that will be assessed in the light of the total outlook for inflation at the time of the Riksbank’s next monetary policy meeting, which is on 23 August.
As of 11 July, the deposit and lending rates will also be changed, from 3.25 and 4.75 per cent, respectively, to 3.5 and 5 per cent.
The minutes of the Executive Board’s monetary policy discussion at yesterday’s meeting will be published on 26 July.
A press conference with Governor Urban Bäckström and First Deputy Governor Lars Heikensten will be held at 10.30 a.m. on Friday, 6 July, at the Riksbank; admission by press card at 11 Brunkebersgtorg.
