Weaker price and cost pressure Although we have not changed our views of developments in economic activity, during the autumn and at the beginning of this year we have gradually changed our view of inflationary pressure in the Swedish economy. This is connected with the labour market showing a weaker development than was forecast in December. Another factor is that productivity has increased more rapidly than expected, resulting in lower domestic cost pressure. A further factor is that the recent decline in inflation appears to have had some effect on inflation expectations, which have fallen slightly. Some of these are factors we pointed to already in December. At our meeting in early February we were able to base our decision on statistics from a further couple of months which reinforced the picture. Inflation was expected to be below target level and we therefore cut the repo rate by 0.25 percentage points. Let me go into these factors more closely and comment on them in the light of events since February. This is because it is essentially these factors that lie behind the decision we made yesterday. During the latter part of 2003 unemployment rose relatively sharply. A number of factors contributed to this. Demand for labour declined both in the business sector and in the public sector, and there were cutbacks in labour market policy measures.
The result of our endeavour to act consistently and symmetrically has been fairly good; inflation has remained in line with the target level during the years of inflation-targeting policy. Nevertheless, I would like to point out that we do not follow our rules of action mechanically. Our focus is on the inflation rate one to two years ahead, and in this perspective we are clearly below the target level and today’s decision is therefore well-motivated. In addition, inflation will probably be well below target level for the greater part of the coming year, while it is difficult to envisage any strong reasons why it should accelerate rapidly beyond the forecast horizon. This is connected with the fact that there is presently a high level of unutilised resources in the economy and that resource utilisation is expected to increase slowly. Given this background, there should be plenty of time to take action and raise the rate in future; when and if there is reason to believe that inflationary pressure is growing. We also try to take into account in our actions risks to financial stability. This is primarily done on the basis of information on how lending and so on affects the banks, and through them, the payment system. However, there is also a more difficult problem concerned with how credit expansion and asset prices affect the conditions for the stability of the payment system, as well as for developments in the real economy in a slightly longer-term perspective.