Inflationary pressures are still low in the Swedish economy, but are expected to rise as the labour market improves and economic activity strengthens. The repo rate needs to be raised gradually towards more normal levels to attain the inflation target of 2 per cent and at the same time contribute to a stable development of the economy. The Executive Board of the Riksbank therefore decided at its most recent monetary policy meeting in the beginning of June to raise the repo rate by 0.25 of a percentage point to 0.75 per cent. Another factor is that household indebtedness has increased significantly in recent years.
During the summer two of the three fixed-interest rate loans issued to the banks in 2009 reached maturity. The fact that these loans have matured and not been replaced by new loans at a low, fixed-interest rate is also a part of the normalisation process for monetary policy.
The forecast for the repo rate remains unchanged in relation to the July Monetary Policy Report, as the total revisions to the forecasts made in July are minor.
The next repo rate decision and forecast will be published on 26 October 2010
The fact that the Riksbank presents its views on an appropriate path for the repo rate does not mean that it is committing itself to a particular future monetary policy. The repo rate path is a forecast and not a promise As with all forecasts, the forecast for the repo rate may need to be changed on the basis of new information on economic developments abroad and in Sweden, and the effects these may have on the prospects for inflation and economic activity in Sweden.
The Executive Board of the Riksbank makes decisions on the repo rate six times a year. At the same time, a forecast for the repo rate over the coming years, known as the repo rate path, is published. The decision on the repo rate always applies until the next monetary policy meeting, when a new decision is made. The next meeting will be held on 25 October, and the decision will be published on the following day, 26 October 2010.
Repo rate with uncertainty bands
Per cent, quarterly averages
Inflation
Inflationary pressures are currently low. However, as the labour market situation improves and wages increase more quickly in the coming period, inflationary pressures are expected to increase. CPI inflation is expected to rise from the current level of 1.1 per cent to a peak of almost 3 per cent during mid-2013. During 2011 the CPI will rise rapidly. This is mainly because housing costs will increase as a result of the increases in the repo rate that have now begun.
On the other hand, CPIF inflation, which is not directly impacted by changes in household mortgage rates, is expected to fall back and rise by just under 1 per cent, during mid-2011. Following this, the CPIF is expected to rise at a faster rate and reach 2 per cent in early 2013.
CPI with uncertainty bands
Annual percentage change
CPIF with uncertainty bands
Annual percentage change
GDP
Sweden’s GDP has developed strongly during the first half of the year. Investment has now begun to rise earlier than expected, and companies have begun to build up their stocks now that production has accelerated.
The Swedish export-dependant economy was hit hard by the global recession in 2008 and 2009. Now that world trade is picking up, Sweden’s economy is expected to grow more rapidly than those of many other countries in the years ahead, as production must increase from a low level. Another reason for the rapid growth of the Swedish economy is the relatively strong state of the public sector finances, which means that Sweden, unlike many other countries, will not have to implement any fiscal policy tightening. This suggests that, in the period ahead, the Swedish economy will grow more rapidly than those of the euro area or the United States, for example.
Households and companies are optimistic about the future, and this is expected to maintain domestic demand over the coming years. Swedish GDP growth is expected to exceed 4 per cent during 2010, before increasing at a slower rate in line with international growth.
GDP with with uncertainty bands
Annual percentage change, seasonally-adjusted data
Notes and sorces
Note. The uncertainty bands for the repo rate, inflation and GDP are based on the ability of risk-adjusted market rates to forecast the future repo rate. The uncertainty bands in the fi gures are based on historical forecast errors.
Sources: Statistics Sweden and the Riksbank.