Repo rate lowered by 0.5 percentage points
The whole report as a pdf
At its meeting on 4 June, the Executive Board of the Riksbank decided to lower the repo rate from 3.5 per cent to 3.0 per cent. This decision, which will apply from Wednesday, 11 June, is based on the picture of future inflation presented in the Riksbank's Inflation Report.
The picture of international economic activity has gradually deteriorated. The expected recovery has been postponed and growth forecasts have been successively revised down. There are several factors behind this. One is that the adjustments in companies and households' balance sheets in the wake of the burst stock market bubble have become more protracted, which has subdued consumption and investment. In addition, geopolitical uncertainty, which culminated when the war in Iraq broke out, has subdued developments.
As the armed conflict in Iraq is now over, the focus is once again on the underlying strength of the global recovery. The statistics received so far still give no clear indication of a strengthening in economic activity. There are numerous indications that growth in the global economy, which became sluggish during the latter part of 2002, will remain weak in the near future. The labour markets in both the USA and Europe have deteriorated more than expected, which is assessed to have a dampening effect on consumption. Household incomes in the USA also appear to be increasing at a slower rate than expected, which will have a similar effect. In addition, tighter fiscal policy in Europe points towards a slightly lower international level of resource utilisation and weaker global market growth than in earlier assessments. The Inflation Report's main scenario still anticipates an economic upturn in the OECD area, but compared with earlier forecasts the recovery has been postponed somewhat. GDP growth is anticipated to be 1.7 per cent in 2003 and approximately 2.5 per cent in the following two years.
A modest level of resource utilisation in the rest of the world means that international price pressure will remain relatively low during the forecast period. Oil prices are expected to fall and the krona to appreciate over the coming two years. All in all, this gives a continued weak increase in import prices.
Weaker international economic activity is in turn expected to have a dampening effect on demand in the Swedish economy during the forecast period. Exports will show weaker development and the expected upturn in investment has been postponed. All in all, the assessment in the main scenario is that GDP growth will amount to 1.2 per cent in 2003. Over the following two years the rate of growth is expected to increase, reaching 2.4 per cent. Resource utilisation is expected to be lower during the entire forecast period than was assessed earlier.
Inflation has been slightly lower than expected. This is mainly explained by oil prices falling more rapidly than anticipated in the March forecast. In April, CPI and UND1X inflation were 2.3 and 2.4 per cent, respectively. Electricity prices have fallen, in line with the Riksbank's assessment, contributing to lower inflationary pressure. The weaker development in demand both in Sweden and abroad entails lower inflationary pressure for almost the entire forecast period. CPI inflation is expected in the main scenario to be 1.3 and 1.9 per cent, respectively, one and two years ahead. The corresponding figures for UND1X inflation are 1.1 and 1.6 per cent respectively. UND1X inflation adjusted for the effects of energy prices is expected to be relatively stable, amounting to just below 2 per cent for the greater part of the forecast period.
The probability of international economic activity developing at a poorer rate than in the Riksbank's main scenario is assessed to be greater than the probability of a better development, despite some downward adjustment in international prospects for inflation and growth in the Report's main scenario. Adjustment problems in the global economy may be greater than expected. In addition, a continued depreciation in the US dollar may have a dampening effect on inflation in the euro area and in Sweden. The main risks for higher inflation are still assessed to stem from electricity prices and wage costs. However, recent developments in electricity prices, the lower level of resource utilisation and the outcome of the collective wage agreements in the municipal workers' sector indicate that the upside risks have declined somewhat. On the whole, the balance of risks for inflation one and two years ahead is judged to be on the downside. Taking into account the risk spectrum, CPI inflation is expected to be 1.2 per cent one year ahead and 1.8 per cent two years ahead. The corresponding assessments for UND1X inflation are 1.0 per cent and 1.5 per cent respectively.
The forecasts for inflation presented in the Inflation Report provide scope to lower the repo rate. One explanation for the very low UND1X inflation expected one year ahead is the anticipated fall in energy prices for consumers in the near future. Such temporary changes in inflation need not affect monetary policy. At the end of the forecast period we are now observing, the temporary effects on inflation of fluctuations in energy prices will have abated. The changes made in the assessment mean that UND1X inflation is expected to be significantly lower than the target level both one and two years ahead. This also applies if energy prices are excluded.
The future direction for monetary policy will depend on the information received on economic developments in Sweden and abroad and the effects this may have on future inflation in Sweden.
The minutes of the Executive Board's monetary policy discussion from yesterday's meeting will be published on 18 June 2003.
A press conference with Riksbank Governor Lars Heikensten and Deputy Governor Irma Rosenberg will be held at 11 a.m. at the Riksbank, Brunkebergstorg 11. Press cards must be shown.
The press conference will also be transmitted on the Riksbank's website.
The Inflation Report can be downloaded from the Riksbank's website, http://www.riksbank.se/ under the heading Publications/Inflation Report, or ordered from Information Riksbanken, e-mail forradet@riksbank.se, fax +46-8-787 0526 or tel. +46-8-787 0100.
