Lars Heikensten: The economic situation and monetary policy Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the Swedish embassy, London, 20 September 2004. *  *  *  Thank you for the invitation to the Swedish embassy and for the opportunity to speak about the economic situation and Swedish monetary policy. It is important for the Riksbank to come to London occasionally to meet the participants in the financial markets that regularly follow the Swedish economy and our work. My intention today is to give a broad picture of my views concerning the inflation outlook in the years ahead. The starting point will be the most recent Inflation Report in May and the assessments in the press releases that the Riksbank has published thereafter. I will also discuss particularly some issues that have recently been touched upon in the monetary policy debate: oil price developments and household indebtedness as well as developments in residential property prices. Following my introduction I look forward to a lively discussion. International developments The Riksbank’s assessment in the latest Inflation Report in May was that international economic activity would continue to strengthen this year and during the coming two years. During the summer we concluded that there was reason to be somewhat more optimistic about economic growth this year. The high oil price was indeed judged to stifle growth somewhat, but not to such an extent that would derail the upswing. Developments have differed somewhat between various regions.
An unexpectedly steep increase in global demand for oil, not least from the rapidly growing Chinese economy, seems to have been a significant driving force behind the rise in the oil price in 2004. This has led to a marked decrease in the idle capacity in the oil sector. Other relevant factors include unease over the situation in the Middle East and the various circumstances surrounding the Russian company Yukos. The rapid, short-term changes that have characterised the price formation in the oil market also point to a not insignificant element of speculation. Exactly what weight should be attributed to different factors from time to time is difficult to establish. But it is clear that the overall price rise in 2004 has been demand-driven to a larger degree compared with other occasions when the oil price has risen sharply. The increases in the oil price in 1973-74, 1979-80 and 1990 were as we know essentially a result of reductions in the oil supply. The demand for oil will of course play an important part for price developments in the period ahead as well. A key aspect is that more and more countries that previously were economically undeveloped will take the step towards more energy-intensive production. Even if new innovations can be put to use in a couple of years, the fast growth in many developing countries points to a relatively high oil price in the period ahead, too.