The current situation and monetary policy

Date 30/05/2008

"At the time of our most recent interest rate decision in April the situation was difficult to assess. On the one hand, rising energy and food prices in the world market and in Sweden would lead to higher inflation. On the other hand, we were beginning to see signs of a slowdown in Sweden. These counteracting forces still apply today.” These comments were made by First Deputy Governor Irma Rosenberg in a speech held at the Stockholm Chamber of Commerce today.

 

The Riksbank’s task is to keep inflation low and stable and to help make sure that production and employment levels do not fluctuate too much. However, inflation is now high at the same time as economic activity is slowing down. Raising the policy rate in order to curb inflation would lead to a further decrease in economic activity. This is the dilemma that we and the other central banks face.

 

There are now signs that the turbulence in the financial markets has declined. But developments remain uncertain and interbank rates are much higher than before. The weaker international developments also affect Sweden. For instance, we can see that orders from the export market have declined so far in 2008. There are also indications that the labour market in Sweden may weaken. For instance, the demand for labour has waned in recent months. The most recent Economic Tendency Survey shows that both consumers and companies have a more pessimistic view of the Swedish economy and that the need for new recruitment in the business sector has declined.

 

At the same time, inflation is high both in Sweden and abroad. This is related above all to higher energy and food prices in the world market. Inflation expectations are also high in Sweden. According to the most recent Consumer Tendency Survey, households’ expectations of inflation a couple of years ahead have risen substantially. But prior to our next monetary policy meeting we will also receive measures of inflation expectations among other groups which we need to analyse. In this situation the Riksbank’s task is to ensure that the price rises in the world market do not result in permanently higher inflation expectations or secondary effects in the form of higher wages and higher prices for other goods.

 

“There are currently discussions of what will happen to monetary policy when the oil price has risen roughly in line with the alternative scenario outlined in our February report. This could indicate a higher interest rate path. But it is not that simple. The analysis made in that scenario only takes into account an alternative outcome for the oil price. The analysis made in a monetary policy decision takes into account everything that has happened in the economy. How all these aspects should be weighed together is something I and my colleagues on the Executive Board will have to consider when we meet for a new monetary policy meeting in the first week of July,” says Irma Rosenberg.