Rosenberg: Price stability framework remains intact

Deputy Governor Irma Rosenberg gave a talk today at a conference organised by SNS Center for Business and Policy Studies and Affärsvärlden business magazine. Her talk touched on monetary policy and developments in the financial markets following the referendum.

"The past six months have been coloured by the debate on Swedish participation in monetary union. As we are all aware, there are very differing views on the effects EMU membership would have on the Swedish economy. However, a positive note is struck by the broad agreement that evidently exists on the importance of economic stability, with sound public finances and a low, stable inflation rate. The result of the referendum means that the Riksbank will continue to conduct monetary policy with a price stability target. The basis for this will continue to be the forecast of inflation in Sweden one to two years ahead and the target will remain a level of 2 per cent, with a tolerated deviation interval of +/- one percentage point. Inflation targeting has worked very well and we therefore see no reason to make any changes to the monetary policy strategy because of the referendum result. We will continue to publish Inflation Reports and uphold transparency and clarity in our monetary policy as far as possible. There is currently strong support for the Riksbank's monetary policy and considerable confidence in the inflation target. However, it is important to remember that economic policy as a whole must be conducted in a responsible manner to provide the right conditions for continued success in combating inflation. I am therefore making a mental note of the claims in the government's Statement of Government Policy, namely that the economic policy goals stand firm and the expenditure ceiling and surplus target will be maintained," said Irma Rosenberg.

"The fact that the result of the referendum was a "no" vote has not led to any strong reactions in the financial markets, probably because most analysts were expecting this result. The Riksbank's assessment has for many years been that the krona is undervalued in real terms; i.e. that there is reason to expect it to appreciate. Favourable underlying factors indicate that this is likely, for instance a relatively strong growth rate compared with the average in Europe and a stable surplus on the current account since the mid-1990s. Conditions are also right for a future appreciation of the krona. However, it is as yet too early to determine whether the appreciation we have seen following the referendum will endure. Anyone who has attempted to forecast exchange rate fluctuations knows how difficult it is to predict developments in the foreign exchange market and in particular exactly when a change can be expected. In the bond market, the interest rate differential between Swedish and German bonds, which is often used as an indicator of confidence in the Swedish economy, has increased somewhat since last Sunday's result. However, the increase is slight. The fact that we currently enjoy sound public finances and stability in the Swedish economy contributes to a feeling that the marked fluctuations of previous times have been left behind. Nevertheless, if we were to deviate from a policy of sound public finances and low inflation, Sweden would risk seeing interest rates on SEK-denominated bonds rising steeply in relation to other countries once again," said Mrs Rosenberg.

"We are currently paying some premium in the form of an interest rate differential between Swedish and German long-term market rates on the exchange rate uncertainty, and perhaps also poorer liquidity in the interest rate markets for remaining outside the Eurosystem. It is, however, difficult to make a total assessment of the economic consequences of remaining outside. In the short term, I see no significant effects at all. However, in the longer term, the conditions for growth may appear poorer with a national currency due to a weaker growth in trade than in the euro area. At the same time, I believe that other factors, such as taxes and the design of the social insurance system, could actually have a stronger effect on growth conditions," said Mrs Rosenberg.

"Let me conclude by pointing out that the signs of a recovery have increased over the summer, both in Sweden and abroad. I am therefore more optimistic now with regard to economic activity than I was in June, when we presented our previous Inflation Report. All in all, I consider economic developments so far to be largely in line with the assessment made at our most recent Executive Board monetary policy meeting in August. Now we shall be monitoring incoming data and you can read a more in-depth assessment of economic prospects and what these will mean for inflation over the coming 1-2 years in our October Inflation Report," concluded Mrs Rosenberg.