Nyberg: Sweden after the euro referendum

Deputy Governor Lars Nyberg today spoke at Swedbank Capital Markets Day about the Riksbank and the situation for the Swedish economy following the referendum.

"A majority of the Swedish population voted "no" to introducing the euro in the referendum. What this means for the Riksbank is that we will continue to conduct monetary policy on the basis of forecasts of inflation 1-2 years ahead. The target for monetary policy is, as before, an annual inflation rate of 2 per cent, with a tolerated deviation interval of plus/minus one percentage point. There is no reason to make any changes to our monetary policy strategy because of the referendum result. We have good experiences from the years of inflation targeting and there is currently strong support for the Riksbank's monetary policy," Mr Nyberg observed.

"The significance for the Swedish financial market of a "no" vote to participation in the Eurosystem should not be exaggerated. Developments in the financial sector are largely governed by other trends that are not dependent on currency, such as technological progress and establishment of joint regulatory frameworks with other countries. These are global factors, which are reinforced by the harmonisation in the EU's single market. However, it is possible that a single currency could hasten this development," said Mr Nyberg.

"Since the June Inflation Report the uncertainty connected with the war in Iraq has abated and financial market participants have begun to focus on economic signals once again. Developments in the financial markets, where the weakening of the dollar has come to a halt, while long-term interest rates and stock market prices have risen, indicate that the concern over the recovery in the US economy has declined. With regard to Sweden, the uncertainty connected with the impending referendum led to a weakening of the krona against the euro during the late summer, while the long-term interest rate differential against Germany increased. Following the "no" vote, the reactions were moderate, which can be interpreted to mean the result was largely expected. Since then the krona has strengthened as a result of the uncertainty dissipating. However, the long-term interest rate differential against Germany remains high. Compared with the euro area countries, Sweden has a larger interest rate differential against Germany, which can be interpreted to mean that Sweden is paying a price for remaining outside the currency union," said Mr Nyberg.

"The National Accounts for the US economy show a relatively strong growth in domestic demand during Q2 this year, with a positive contribution also coming from corporate sector investment. In addition, household consumption has continued to grow during the summer. The conditions for a recovery in the US are good, with an expansionary economic policy and a high level of productivity growth. Compared with the assessment made by the Riksbank in June, the prospects for the US economy thus appear to have improved. The economic downturn in the US has been relatively mild, which is partly due to low interest rates keeping up household consumption of durable goods and housing investment. However, large deficits in public finances risk leading to a rise in long-term interest rates. It is necessary for corporate sector investment to continue to increase and for an improvement in the labour market situation to achieve a more prolonged economic upturn. The labour market still comprises an area for concern. Developments in the euro area have been slightly more negative than was assumed in the June Inflation Report. Unlike the US, growth in the euro area fell during Q2, while unemployment remains high. Recently, however, confidence indicators have begun to show increased optimism among firms in the euro area," said Mr Nyberg.

"The Inflation Report published in June outlined weaker international growth, which it expected would contribute to subduing demand in Sweden and result in lower resource utilisation. It was assumed that inflation in Sweden would be well below the Riksbank's target level of 2 per cent during the forecast period. As a result, the Executive Board of the Riksbank saw scope to cut the repo rate by a total of 0.75 percentage points during the summer. The information received since June regarding the Swedish economy shows a brighter, but at the same time less clear, picture of economic growth. According to preliminary figures, growth during Q2 was slightly stronger than was assumed in the June Inflation Report. Together with the interest rate cuts, this could indicate a somewhat more positive outlook for the Swedish economy than was assumed then. Nevertheless, domestic growth is held up by private consumption, while investment remains at a low level. In addition, the labour market is weak, resource utilisation at a low level and manufacturing activity remains uncertain. However, it is possible to interpret the most recent indicators for industry to mean that there has been a slight improvement in manufacturing activity," said Mr Nyberg.

"I consider it important to once again emphasise that the role of the Riksbank remains the same as before the referendum. The Executive Board will determine the repo rate on the basis of forecasts of Swedish inflation 1-2 years ahead. The Riksbank will now monitor trends and provide a new assessment of the economy and forecasts for inflation in its October Inflation Report. However, the information received indicates that there is reason to be slightly more optimistic about economic growth than there was in June. Developments are largely in line with the assessment made at the monetary policy meeting in August," concluded Mr Nyberg.