Repo rate cut by 0.25 percentage points

At its meeting on 3 July, the Executive Board of the Riksbank decided to lower the repo rate from 3.0 per cent to 2.75 per cent. This decision, which will apply from Wednesday, 9 July, is based on the picture of future inflation presented in the June Inflation Report and on new information about economic developments received since then.

Over the past year, economic activity in Sweden and abroad has gradually deteriorated and the expected recovery has been delayed. Several central banks have cut their key rates since the June Inflation Report. This was expected and does not require making any revision in the assessment of international growth prospects. A new taxation package has been adopted in the USA and this is expected to have positive, albeit limited, effects on household consumption in particular at the end of this year and during 2004. Growth in the USA can therefore be expected to be slightly higher in these years. In the euro area, economic activity remains weak and could show a slightly poorer development than previously anticipated. All in all, the prospects for world market growth remain largely the same as in the June Inflation Report.

Since the previous monetary policy meeting, new Swedish National Accounts statistics for Q1 have been published. These indicate a slightly higher GDP growth this year than was previously expected, largely due to public consumption and inventory investment developing at a slightly stronger rate, and imports of services being slightly lower, than anticipated. In addition, the Riksbank cut its repo rate by 0.5 percentage points in June. This is expected to result in a slightly higher level of private consumption and investment in 2004 and 2005 compared with the assessment in the Inflation Report. All in all, the level of resource utilisation is expected to be slightly higher during the entire forecast period than was previously anticipated.

Inflation has recently been slightly lower than expected. Both domestic and imported prices have risen less than was previously calculated. In May, CPI and UND1X inflation were 1.9 and 2.0 per cent, respectively. Compared with the assessment in the June Inflation Report, inflationary pressure is expected to be marginally higher at the end of the forecast period as a result of the slightly stronger development in demand.

There has been no reason for any decisive revision to the risk spectrum outlined in the June assessment. The probability of international economic activity growing at a lower rate than assumed in the Riksbank's main scenario is therefore still assessed as slightly higher than the probability of a higher rate of growth. The primary upside risks for inflation are still judged to be connected to electricity prices and wage costs.

The overall picture of international economic activity remains largely unchanged since the June Inflation Report. The interest rate cut in June has contributed to a slight improvement in prospects for the real economy in Sweden. The level of resource utilisation is thus expected to be slightly higher over the coming years, as is the inflation rate two years ahead. However, the assessment is still that there will be unutilised resources during the forecast period. UND1X inflation is expected to be below the inflation target both one and two years ahead. This also applies when energy prices are excluded from the picture. Given this, the assessment of the Executive Board is that there is scope to further lower the repo rate.

The future stance of monetary policy will depend on new information on economic developments in Sweden and abroad and the effects this may have on inflation prospects in Sweden.

The minutes of the Executive Board's monetary policy discussion from yesterday's meeting will be published on 17 July 2003.

A press conference with Riksbank Governor Lars Heikensten and Deputy Governor Irma Rosenberg will be held at 11 a.m. at the Riksbank. Entry via the bank's main entrance, Brunkebergstorg 11. Press cards must be shown.