Repo rate left unchanged at 3.5 per cent

At its meeting on Thursday, 24 April, the Executive Board of the Riksbank decided to leave the repo rate unchanged at 3.5 per cent. This decision, which will apply from Wednesday, 30 April, is based on the picture of future inflation presented in the March Inflation Report and on new information about economic developments received since then.

Developments in the world economy have recently been affected to a large degree by the Iraq crisis. In the March Inflation Report, it was noted that the crisis posed a serious threat to the world economy but also that the consequences were difficult to predict. There was a risk of rising raw materials prices and inflation, as well as of weaker demand and low inflation. The war in Iraq broke out at approximately the same time as the publication of the March Inflation Report. At present, it appears that the armed conflict has largely come to an end. The level of uncertainty can therefore be considered to have diminished, which is reflected in part in measures of financial risk. In spite of this, developments in the financial markets have not been as positive as many had expected. One possible interpretation of this is that some uncertainty remains over how far the adjustment process following the stock market decline has come. The price of oil, which dropped as soon as the war began, has fallen lower than was expected.

Various confidence indicators suggest that the optimism of households and firms has been subdued further. This could partly be a consequence of the fact that this data was gathered in while the war in Iraq was in progress. Data received thus far on employment and household income points to somewhat weaker growth in the United States than was anticipated in the main scenario of the March Inflation Report. Fiscal tightening in Europe and somewhat weaker development in the labour markets of several countries advocate a marginal downward revision of the growth forecast for the euro area as well. All in all, there is reason to expect that world market growth this year will be slightly weaker than forecast in the Riksbank's March Inflation Report. The fundamental picture of economic activity remains, however, with international growth increasing gradually during the forecast period.

A continued recovery in the Swedish economy is also judged at present to be the most likely scenario. However, slightly weaker growth in export markets and the sluggish growth in investment seen at the end of last year suggest that the economic recovery will be somewhat slower compared with the assumptions of the March Inflation Report, in spite of the Riksbank's rate cut in March. A somewhat tighter fiscal policy will also contribute in this regard. Thus, it is anticipated that economic growth in Sweden will be slightly lower in 2003, which implies that resource utilisation is also expected to be lower during the forecast period.

Inflation has risen somewhat more than expected since the March Inflation Report, and CPI inflation stood at 3.1 per cent in March. The corresponding figure for UND1X was 3.0 per cent. In the March Inflation Report, it was assessed that electricity prices for consumers would continue to fall, thus helping to restrain inflation considerably during 2004. There is at present no reason to alter this assessment. The fact that the price of oil has fallen back quicker than anticipated, however, is expected to lead to somewhat lower imported inflation one year ahead and consequently a somewhat higher figure in the longer term.

The assessment in the March Inflation Report included both upside and downside risks for Swedish inflation. The principal downside risk was judged to be the uncertainty surrounding international economic developments, even excluding the Iraq crisis. Despite a small downward revision of the growth forecast for the world economy, some downside risk remains. The main upside risks for inflation are still judged to come from larger than expected contagion effects from high electricity prices and from the wage bargaining round.

The decision to lower the repo rate in March was affected by the concern and uncertainty in the world economy that stemmed from the threat of war in Iraq. This uncertainty has now subsided. To sum up, it is anticipated that inflation will exceed the inflation target in 2003 and fall short of the target in 2004, as in the March Inflation Report. Compared with the previous assessment, inflation is now expected to be marginally lower one to two years ahead. This also applies to inflation adjusted for the effects of energy prices, which is expected however to develop in line with the inflation target. The economic indicators that have been available thus far were compiled while the war in Iraq was in progress, thus making them difficult to interpret. Whether the tendencies towards weaker activity will remain is still too early to ascertain. It has therefore been decided to leave the repo rate unchanged for the present time. Important factors in the future direction of monetary policy include whether the picture of a slower recovery remains.

The minutes of the Executive Board's monetary policy discussion from yesterday's meeting will be published on 12 May.