Rosenberg: Economic activity in line with previous forecast
Deputy Governor Irma Rosenberg today spoke at Mäklarmässan (Real-Estate Agent Trade Fair) on the subject of "Current monetary policy issues".
"Allow me to begin by describing how we work at the Riksbank. The Riksbank's objective is to keep inflation measured by the consumer price index (CPI) at 2 per cent per year. Adjustments to the repo rate have their main effect on inflation via demand 1-2 years ahead. Monetary policy is therefore normally aimed at attaining the inflation target in this time horizon. However, there may be reasons to deviate from this simple rule, as described in detail in a clarification in 1999 published by the Executive Board. One reason may be when CPI inflation is affected by shocks that are not anticipated to have lasting effects. However, when this is the case, the Riksbank should clearly state at the time of its monetary policy decision how inflation is expected to deviate from the target. One example of this is how we decided this year to adjust inflation for the effects of the sharp fluctuations in energy prices, which we mainly judge to be temporary. In order to prevent policy from being affected by the direct effects of housing costs, which means that lower interest rates in the short term give rise to lower inflation, we have so far mainly chosen to focus on the inflation measure UND1X excluding energy prices. The fact that the Riksbank from time to time must assess whether temporary price effects exist could indeed make interest rate adjustments somewhat more difficult to predict than if we mechanically followed one and the same measure. However, the macroeconomic outcome of the interest rate decisions hopefully becomes better," began Mrs Rosenberg.
"The elusive recovery in international economic activity that has been postponed time and again in recent years now appears to be taking firmer root. For instance, there now seems to have been an upturn in business investment in the United States, according to preliminary data on GDP growth. With that, demand, which in the past few years has been held up by household consumption, now rests on more stable foundations. In the period ahead, low real rates of interest and a continuation of good earnings growth are expected to further enhance conditions for investment at the same time as tax cuts and a slightly brighter labour market will help to hold up consumption in the United States. Developments have also been favourable in Asia, eastern Europe and central Europe. In the euro area, however, growth has been markedly slower so far this year. The second quarter even witnessed a decline in GDP. However, recent data indicate some recovery in the euro area countries as well. Preliminary figures showed a revival in growth during the third quarter, and the labour market has stabilised somewhat. A certain amount of optimism is also evident in firms' expectations of future demand," said Mrs Rosenberg.
"International developments thus far are largely in line with the Riksbank's forecast in the October Inflation Report. This also applies to our view of the Swedish economy. It is true that the recovery in manufacturing has been sluggish, but firms remain relatively optimistic about the future. Investment is being bolstered by low real rates of interest and improved profits, and productivity has shown recent improvement. New tax increases by local governments could curtail growth in household disposable income somewhat during the forecast period. But, on the other hand, continued stable growth in employment and wealth point to relatively favourable growth in consumption," said Mrs Rosenberg.
In its October Inflation Report, the Riksbank judged that the risks of lower inflation stemmed from fears of slacker international economic activity. The European outlook is still uncertain, and in spite of stronger activity in the United States, the deficits in the US current account and federal budget could make a stable, sustainable recovery more difficult there too. But another issue that we have reason to consider is if the most recent international data could not also be an indication of a stronger and more broad-based international upturn. Domestically, we stressed in the previous report the upside risks that stemmed from developments in electricity prices and wages. These risks remain. At the same time, there is reason to assess whether recent economic developments in Sweden also entail downside risks due to a weaker labour market and better productivity."
"As regards the overall assessment, this is something we will have to return to in connection with the next Inflation Report, which is published on 5 December. In the time ahead, it will be important to monitor whether economic developments are following the path we expect both in Sweden and abroad," concluded Mrs Rosenberg.
