Repo rate left unchanged at 3.75 per cent

At its meeting on Thursday, 6 February, the Executive Board of the Riksbank decided to leave the repo rate unchanged at 3.75 per cent. This decision, which will apply from Wednesday, 12 February, is based on the picture of future inflation presented in the December Inflation Report and on information received since then.

Since the December Inflation Report, there has been a slight deterioration in the outlook for the international real economy and uncertainty over security policy developments has increased slightly. Economic activity in Sweden is roughly as depicted in the most recent Inflation Report, although the assessment is that inflation will be higher in 2003 than was assumed earlier, due to the upswing in energy prices.

Various economic indicators provide a fragmented picture of the future prospects for the global economy. Industrial activity has improved somewhat, but at the same time households appear to have revised down their expectations for the future. In the USA, the expansionary policy and a favourable development in productivity entail relatively good conditions for a domestically-driven recovery. Weighing against a more tangible recovery are factors such as the remaining financial imbalances and higher oil prices. The prospects for the euro area appear slightly poorer than before, despite an increase in industrial production, and a slight downward revision to the GDP forecast for this year may be necessary. Given this, growth in the OECD area as a whole is expected to be slightly weaker than was estimated in December 2002.

The picture painted in the December Inflation Report, of a gradually improved development in the Swedish economy, from a situation with a relatively high level of resource utilisation, still holds true in all essentials. However, the revised figures for the National Accounts indicate that resource utilisation may be slightly lower than was previously calculated. There is as yet no clear sign that industrial activity has really taken off. Households' savings rose during 2002 and their optimism with regard to the economy appears to have been subdued in recent months. Purchasing power will be checked in 2003 by rising energy prices and tighter fiscal policy. Nevertheless, it is assessed that there is relatively good scope for consumption, partly due to the higher savings last year. All in all, domestic demand is expected to increase somewhat during the forecast period and the Swedish economy is expected to grow at a rate sustainable in the long term. This means that there will be no significant change in resource utilisation.

Inflation has so far developed in line with the assessment in the most recent Inflation Report. In December, CPI inflation was measured at 2.3 per cent and UND1X inflation at 2.2 per cent. Following on from low water levels in the energy companies' reservoirs and a period of cold weather, electricity prices have soared. This in combination with higher oil prices is expected to lead to a rise in inflation during the spring, and later to a decline in inflation when energy prices are lowered again. Following this, inflation is expected to rise again and to be in line with the inflation target at the end of 2004.

The risk spectrum is dominated by the international security policy situation. The actual uncertainty concerning the consequences of a potential war in Iraq and the possibilities of achieving stability in the region may entail a slower than expected development in investment and growth throughout the entire OECD region. This reinforces the uncertainty in the financial markets. These problems are currently overshadowing the more normal risks that should be taken into account when assessing inflationary pressure during the forecast period. In this perspective, i.e. one to two years ahead, there are risks for inflation connected with both potential contagion effects from the energy price rises and with wage formation.

The current assessment is that inflation will be above the inflation target level in 2003 and below the target level in 2004. This is largely due to the severe fluctuations in energy prices, which are assessed to be primarily of a temporary nature. At the end of the forecast period inflation is expected to be in line with the Riksbank's target level. This, together with the considerable uncertainty currently prevailing in the global economy, speaks in favour of leaving the repo rate unchanged at present. The future direction for monetary policy will depend, as usual, on the incoming data and how this affects the total assessment of future inflation in the coming years.

The minutes of the Executive Board's monetary policy discussion from yesterday's meeting will be published on 20 February 2003.