Repo rate lowered by 0.25 percentage points to 3.5 per cent
The whole Inflation Report (pdf)
At its meeting on 17 March, the Executive Board of the Riksbank decided to lower the repo rate from 3.75 per cent to 3.5 per cent. This decision, which will apply from Wednesday, 19 March, is based on the picture of future inflation presented today in the Riksbank's Inflation Report.
Economic growth in both Sweden and the rest of the world showed some recovery during last year, but the recovery appeared to slow down towards the end of the year. Continued uncertainty associated with falling share prices and the risk of war in Iraq has had a negative effect on economic prospects since the previous Inflation Report. The picture of a gradual recovery painted by the Riksbank in December, and in connection with the monetary policy meeting in February, still largely holds, but the upswing is now expected to be slower. Developments in the large euro countries have been surprisingly weak and the prospects of a clear recovery now appear more gloomy. All in all, the Riksbank's assessment is that international economic activity will be slightly weaker. This means that resource utilisation will remain relatively moderate during the forecast period. Growth in the OECD area is expected to be 2.0 per cent in 2003, 2.7 per cent in 2004 and 2.6 per cent in 2005. International price pressure is expected to become subdued, and not change significantly in relation to the assessment in the December report.
The lower international demand will lead to Swedish exports developing at a slightly slower rate than in the Riksbank's earlier assessments. There are no clear signs of an upswing in industrial activity. During the present year households' purchasing power is expected to be subdued by increases in municipal and county council taxes, higher energy prices and rising unemployment. This, together with continued unease over the Iraq conflict, is expected to entail a rather more subdued growth in consumption. All in all, growth in the Swedish economy is expected to be relatively slow during 2003, and thereafter to be at around the long-term sustainable rate. GDP growth is assessed to be 1.7 per cent in 2003 and 2.4 per cent in 2004 and 2005. The Swedish National Accounts have been revised and an analysis of these indicates that there are more unutilised resources than was previously anticipated. Taken together, this means that resource utilisation is expected to be slightly less strained.
Inflation has risen discernibly since the December report and UND1X inflation amounted to 3.3 per cent in February. This is largely due to higher energy prices resulting from extremely low water levels in hydroelectric power station reservoirs and higher oil prices. Excluding energy, UND1X inflation has fallen and amounted to 1.9 per cent in February. The energy price increase is expected to essentially entail temporary effects on price levels and inflation is expected to fall again during the spring as electricity and oil prices decline.
The forecasts in the main scenario of the Inflation Report indicate an average rate of increase in CPI inflation of 2.0 per cent over the coming year and 1.7 per cent one to two years ahead. The corresponding figures for UND1X inflation are 2.0 per cent and 1.4 per cent respectively. However, the picture is more complicated than this. The reason why inflation is expected to be clearly lower than the target level one to two years ahead is that electricity and oil prices are expected to fall back from their present high levels. This will lead to considerable fluctuations in inflation. The Riksbank explained in its clarification and appraisal of the inflation target in 1999 why such temporary changes in inflation need not affect monetary policy.
With regard to the risk spectrum, the possibility that the higher energy prices will have more prolonged effects on inflation cannot be ruled out. In addition, there is a risk that the wage bargaining rounds in the autumn will result in higher wage increases than expected. The primary downside risk for Swedish inflation is connected with the total uncertainty over economic developments in the rest of the world. There is a risk that activity in the euro area will be weaker than anticipated. It is also significant that the geopolitical situation creates uncertainty and poses a threat to the global economy which is difficult to assess, but should be included in the information on which monetary policy decisions are based.
The forecasts of inflation presented in the Inflation Report provide scope for lowering the repo rate. An important circumstance here is that the unease and uncertainty in the global economy risk leading in the short term to a much worse development in economic activity than described in the main scenario. It is difficult at present to determine the future direction for monetary policy, which will depend partly on the development of the Iraq crisis and the effects of its possible outcome on inflation prospects.
The minutes of the Executive Board's monetary policy discussion from yesterday's meeting will be published on 28 March 2003.
Governor Lars Heikensten will provide an account of monetary policy to the Riksdag Finance Committee at 10 a.m. today and answer questions.
A press conference with Deputy Governor Irma Rosenberg, Anders Vredin and Hans Lindblad, the Head and Deputy Head of the Monetary Policy Department, will be held at 2 p.m. on Tuesday, 18 March at the Riksbank, Brunkebergstorg 11. Press cards must be shown.
The Inflation Report can be downloaded from this website under the heading Publications/Inflation Report, or ordered from Information Riksbanken, e-mail: forradet@riksbank.se, fax +46-8-787 05 26 or tel. +46-8-787 0100.
Contact: Tomas Lundberg, Press Officer, +46-8-787 02 15
