Inflation prospects difficult to assess One consequence of the Riksbank basing its analysis on conditions in Sweden — and not being guided by the actions of other central banks — is that in the past the repo rate has been held at a considerably lower level than in the United States. There have also been periods when our instrumental rate has been below that of the European Central Bank. The central factor when the Riksbank sets its instrumental rate is the prospects for inflation one to two years ahead. A prospect of inflation above the 2 per cent target normally leads to a repo rate increase, while if inflation is expected to be lower than the target level, the repo rate should normally be lowered, and if the rate of price increases is forecast to lie around the target level of 2 per cent, the rate should be left unchanged. The economic outlook in the rest of the world ought to imply a weak tendency in Sweden as well, with an attendant easing of inflationary pressure and consequently a further reduction of the repo rate. However, the decision-making situation is not that simple. Three things in particular make the picture more complicated: ·  Firstly, inflation is currently above the Riksbank’s 2 per cent target. The greater part of the increase is admittedly attributable to a number of clearly defined transitory factors that are calculated to drop out next spring. Food prices, for example, moved up in connection with mad-cow and foot-and-mouth disease.
It is therefore important to take very seriously the discussion going on within the trade union movement regarding larger than expected price increases. The weak exchange rate, with the potential economic stimulus it represents via exports, is more complicated. In the past, a marked improvement in costs for Swedish exports relative to the main competitor countries has tended to lead to an increased export market share. At the same time, there is no denying that the international economic slowdown is particularly evident in markets of importance for Sweden’s economy. As long as those markets remain weak, a larger market share for Swedish firms will not yield a notable increase in volume. Another matter here is that in the IT and telecom sectors, on which the Swedish economy became increasingly dependent in the 1990s, the problems are not dependent on the krona’s exchange rate; here it is more global factors that are decisive. However, it can also be noted that the order inflow to manufacturing is now falling less markedly than earlier this year. There are certain signs of a levelling out, usually an early indication of a possible upturn in the coming quarters. Analysts’ expectations of this year’s profits for listed companies have clearly worsened during the autumn but this has been accompanied by a substantial upward revision of next year’s profits. So the overall appraisal of the krona’s exchange rate and its stimulatory effect is not entirely self-evident. Finally there is the question of economic policy’s aggregate impact on demand.