The Riksbank has a target for inflation, not for the krona exchange rate – but the exchange rate affects inflation The krona and the role it plays, and will play, for inflation in the future is an issue that has been in focus in the economic debate. The Riksbank discussed this in connection with our decision in February. In brief, our assessment was that the weakening of the krona towards the end of last year is contributing to raising underlying inflation to some extent now at the beginning of 2023. But given that the krona has weakened over a long period of time, it is at the same time uncertain how companies take the exchange rate into account and how great the impact will be on inflation in the period ahead. Another reason why we talked a lot about the krona in February was to dispel the myth that the Riksbank is now completely disinterested in the exchange rate. We wanted to emphasise that the Riksbank actually follows the development of the krona closely. At the same time, I pointed out that this does not mean that we have an explicit or implicit target for the exchange rate. The Riksbank has an inflation target and we adjust monetary policy to stabilise inflation around this target. But there is, as I said, a link between the development of the krona and inflation. If the exchange rate weakens substantially, this leads to higher inflation prospects, which requires adjusting monetary policy. This is true.
A credible 2 per cent inflation target acts as an anchor Thus, when inflation is high, there are self-reinforcing mechanisms that allow our expectations to adjust and this contributes to keeping inflation high. But an environment with low inflation can also become self-reinforcing in a similar way. Firms are then more likely to let temporary price and cost increases reduce their margins rather than pass them on to customers. The effects on other firms' prices and costs will then be smaller. Businesses and households recognise that inflation remains low and adjust their expectations accordingly. This means people do not need to worry or even think about inflation in their everyday financial decisions. An inflation target of 2 per cent creates good conditions for such an environment, as it acts as an anchor for the expectations of households and companies and also avoids inflation becoming too low. Households and companies assume that inflation will remain around the 2 per cent target going forward, even if it happens to be higher or lower at the moment. But this presupposes that there is confidence that inflation will eventually return to the target. The longer inflation remains above the target, the greater the risk that households and companies will be more inclined to focus on what inflation has been and set their expectations on it continuing to be above the target. Inflation needs to come down significantly this year This is one of the main reasons why the Riksbank has a low tolerance for continued high inflation at present.