Repo rate retained unchanged at 4.25 per cent

When the decision to raise the repo rate from 4 per cent to 4.25 per cent was taken on 5 July, the Riksbank's assessment was that there existed a clear risk that inflation would exceed the target of 2 per cent. This was due to the interplay between a number of factors. Despite the economic slowdown, resource utilisation was expected to remain relatively high. At the same time, the pronounced weakening of the exchange rate meant that the krona was no longer expected to strengthen to the rate on which earlier assessments were based. In addition, there was judged to be a risk that the rise in inflation during the spring - although probably largely due to transitory effects - could affect inflation expectations and thus the future inflation rate.

During the summer there has been a change, albeit a marginal one, in the inflation perspective for the coming two years. Recently received information indicates a weaker economic climate in the euro area. The recession tendencies in Japan have also been reinforced. This points towards a more pronounced and prolonged global slowdown than was assumed in July. GDP growth in Sweden is also expected to show a poorer result this year, and probably next year as well. Despite this downward adjustment, there is still reason to expect a cautious recovery over the next few years.

Although resource utilisation remains at a relatively high level, the decline in demand means that the amount of resources available over the next few years will be slightly larger than previously expected. This in turn indicates that inflation will be slightly lower than was assumed. The surveys of expected future inflation convey a similar message.
After having implied a slight, albeit undramatical, rise in inflation expectations during the latter part of the spring, they are now in line with the inflation target.

The basis for the assessment of inflation and repo rate decision is that the krona will appreciate to more reasonable levels as the international slowdown is curbed and unease on the world's stock exchanges subsides. However, the exchange rate is still weak and if the krona were to remain at its current level for a long period of time, it could comprise a threat to price stability. This is to some extent moderated by the fact that international export prices will probably develop more weakly than anticipated earlier. A slightly lower level of domestic demand could reduce the impact of the low exchange rate on domestic prices.

The Riksbank's total assessment, taking into consideration the risk spectrum, is that with an unchanged repo rate, inflation two years' ahead will be largely in line with the inflation target. Given this, the Executive Board voted to leave the steering interest rate unchanged.

The minutes of the Executive Board's monetary policy discussion at yesterday's meeting will be published on 6 September.