Ekholm: The interest rate, the exchange rate and inflation
On Monday, Deputy Governor Karolina Ekholm held a speech at Danske Bank in Stockholm. In this, she presented her view of the significance of the exchange rate in the monetary policy process and used this as a basis to discuss the motivation behind the reservation she entered against the repo rate decision and repo rate path at the monetary policy meeting in February.
Ms Ekholm considered that increased interest rate differentials in relation to other countries may have effects on the exchange rate. Her reservation was based on the assumption that foreign central banks will not raise their policy rates as fast as the Riksbank’s latest forecast suggests. Consequently, Ms Ekholm considers that the main scenario’s repo rate path will give rise to a considerably larger interest rate differential in relation to other countries than is assumed in the Riksbank’s most recent forecast. This could lead to a greater appreciation of the Swedish krona than this forecast suggests, which, in turn, would dampen both inflation and resource utilisation. According to Ms Ekholm, a further appreciation of the Swedish krona would thus risk leading to impaired target fulfilment, justifying a lower repo rate path than that decided upon in February.
Ms Ekholm pointed out that, even though there is no target level for the exchange rate, as it is an important determinant for both inflation and resource utilisation, it is of fundamental interest to the Riksbank’s analysis work. The fact that it is difficult to forecast does not mean that it can be ignored, either in the analysis process or in the decision-making process.
Read the speech in full in the PDF below.
