Sweden My view, with hindsight, is that monetary policy in Sweden was also too expansionary in the years preceding the financial crisis. The repo rate was gradually reduced to 1.5 per cent in July 2005. I think it was reduced too much and was too low for too long. Both the nominal and the real short-term rates were lower than normal for most of the period leading up to the crisis. In my opinion, a normal level for the nominal short-term rate is around 4 per cent, while a normal level for the real short-term rate is around 2 per cent1 (see Figure 5). Swedish economic growth was high in the years before the crisis. Resource utilisation was also higher than normal. The GDP gap was positive, while unemployment was lower than the average for the preceding years. Inflation was nevertheless low in the period 2004–2006. Measured in terms of the CPIF2 and in terms of the measure used at that time, the CPIX,3 it  1  Sveriges Riksbank, “What is a normal repo rate?”, article in Monetary Policy Report, February 2010. 2  The CPIF is calculated as the CPI with a fixed mortgage rate and is thus not directly affected by changes in mortgage rates. 3  The CPIX excludes households’ mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies from the CPI. 2  BIS central bankers’ speeches  was well below 2 per cent.
The recent period of low inflation may appear surprising from a cyclical perspective given that we have seen positive economic growth over the past four years, supporting a steady and gradual absorption of economic slack. This has raised the question of 1/4  BIS central bankers' speeches  which factors, cyclical or structural, may have played a role in the growth-inflation relationship. A comprehensive analysis by the Eurosystem has concluded that adverse cyclical factors have played a crucial role in explaining low underlying inflation. These notably consisted of dampened economic activity and high unemployment in the aftermath of the sovereign debt crisis, and subsequently subdued foreign demand and low oil prices.2 Yet, these factors are of a temporary nature and should not affect inflation over a medium-term horizon, even though they might impact on the speed of adjustment in inflation. Moreover, given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures. This is particularly visible in the labour market, where wage growth has remained subdued despite strong employment gains. Nonetheless, these factors should wane as the economic expansion continues and unemployment further declines. In fact, wage growth in the euro area has already picked up recently and the labour market is expected to improve further.