Lars Heikensten: Monetary policy in Sweden  Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, at the Autumn Conference of the Centre for Business and Policy Studies, held in Stockholm on 17 November 2000. *  *  *  Thank you for the invitation to talk about monetary policy. If my memory serves me right, this is the fifth autumn conference I have addressed as deputy central bank governor. For me, the annual opportunity of discussing monetary policy with some of our country’s leading economists and economic observers has become a very enjoyable tradition. I shall begin, as usual, with a brief account of the past year, taking 1999’s October assessment as my starting point. Even though our appraisal of inflation at that time was relatively optimistic, the outcome has been better than we foresaw. Developments in the past year raise questions about the economy’s inflation propensity. That topic was already up for discussion at last year’s conference, though the reason then was that several leading observers considered the risks of inflation were being underestimated by the Riksbank. A third matter I shall be talking about is our monetary policy guidelines. In the past year we have been criticised for basing repo rate decisions on appraisals that are too narrow. Finally, I shall be looking ahead and commenting on our view of inflation in the coming years.
But even with a growth rate of just over 3%, the Swedish economy would be expanding more rapidly than we believe it is capable of in the longer run. Econometric estimates of the output gap. Per cent of potential GDP 4  4  2  2  0  0  -2  -2  PF HP UC  -4  -4  -6 -8 1980  -6 -8 1984  1988  1992  1996  2000 Source: The Riksbank  Let me conclude by underscoring what I mentioned initially, namely that forecasting inflation proved difficult in the 1990s, in Sweden as well as elsewhere. There have been substantial changes in our economies, partly because policy now focuses on stability and competition has become stronger in various ways. Inflation in Sweden has been a positive surprise in recent years even though activity has been rising strongly, so further positive surprises should naturally not be ruled out. Still, there are now many indications that resource utilisation is relatively high and will go on rising. That implies that, little by little, inflationary pressure will grow. We will be presenting a comprehensive assessment of inflation prospects in the December Inflation Report. In that context we will also be deciding the repo rate. Recent developments have not altered the picture I formed in October. Although it is still too early to specify when, there will presumably be grounds for increasing the repo rate in the future. BIS Review 107/2000  6