Continued low repo rate stimulates the Swedish economy We Executive Board members assessed that the repo rate needs to remain low to support economic activity and to ensure inflation rises towards the target. We therefore decided at the meeting in July to hold the repo rate unchanged at 1 per cent, and the repo-rate path shows a slow increase beginning during the second half of 2014. Monetary policy is thus very expansionary. However, the decision to hold the repo rate unchanged also gives consideration to the risks linked to Swedish households’ high debts. Personally, I consider the repo-rate decision to comprise a reasonable balance. The forecast showed that CPIF inflation will attain the target in around two years’ time. An even lower repo rate could have led to inflation attaining the target slightly earlier, but the decision is about stepping on the gas just enough. A lower repo rate would probably also lead to the risks linked to household debt increasing further, particularly bearing in mind that the situation for households was relatively favourable to start with. There could be a particularly difficult situation if households expect the low interest rate to persist. This could lead to both house prices and debts increasing further, which can have very negative consequences in the form of sharply rising unemployment and difficulties in attaining the inflation target further ahead. There are numerous discussions in Sweden and abroad with regard to how much consideration monetary policy should give to various types of financial imbalance, such as high household debt.
Low but gradually rising inflation Inflation in Sweden has been low for a long period of time and we devoted extra space to this fact in the July report.1 It is not so strange that inflation has been low, given the Swedish economy’s dependence on global economic activity. One of the main reasons is that prices of Swedish import goods have been low. This is largely due to global economic activity being weak and having affected global export prices, but the stronger Swedish krona has also  1  A more detailed analysis of the development of inflation is included in the article “The development of costs and inflation” in the Riksbank’s Monetary Policy Report published in July 2013. 2  BIS central bankers’ speeches  contributed. Another reason is that companies have not raised their prices to the same extent as their costs have increased. The low price mark-ups are partly due to demand being lower than normal and to the considerable uncertainty over international developments. In July we assessed that inflationary pressures would gradually increase over the coming years, as Sweden and other countries recover. This means that CPIF inflation is expected to reach 2 per cent in 2015. CPI inflation is expected to be higher than the target of 2 per cent at the end of the forecast period, which is due to mortgage rates rising when the repo rate starts to increase as the economy improves. Let me describe in more detail the factors expected to contribute to the upturn in inflation.