Urban Bäckström: The current situation for monetary policy  Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, before the Standing Committee on Finance, Stockholm, on 10 October 2000. *  *  *  It is gratifying to be able to note, as on so many of my previous appearances here, that economic developments in Sweden are impressive. Having achieved a growth rate in the past six years that averages 3%, it seems that our economy is now expanding at an annual rate of around 3 to 4%. Employment has really taken off. To date this year the number of people in work is 70,000 higher than in the same period of 1999. I can also note, once again, that notwithstanding the rapid economic growth, the rate of inflation has remained moderate. But these favourable developments do not mean that the Riksbank can sit back and relax. The path ahead contains a number of risks to which we must be alert. What lies behind the favourable economic trend? A basic factor behind the Swedish economy’s favourable path is, in my opinion, the economic policy realignment that has been carried out in the past decade and a half. Credit and currency markets have been deregulated, the tax system has been reformed, components of the transfers system have been modified and competitive pressure has increased. All this has helped improve the workings of our economy.
The Boston Fed’s statistical modeling suggests that a $ increase in the price of a barrel of oil will shave roughly four-tenths of a percentage point off the rate of economic growth over two years, and cause the unemployment rate to be roughly two-tenths of a percentage point higher than it would be absent the oil shock. While this is certainly not enough to completely stop the recovery, it does imply a slowing down of its pace. Oil is not the only commodity to experience price increases of late. A variety of agricultural prices have also increased. For example, Figure 3 shows the movement of wheat prices over the last decade. Droughts in Russia, flooding in Australia, and increased demand in emerging markets have all placed upward pressure on wheat prices. As with oil prices, higher food prices appear to be responding to supply and demand features of this market – and these types of price changes cannot be offset by monetary policy. It goes without saying that monetary policy cannot alter the supply of oil from volatile parts of the world, nor weather conditions in countries that are major exporters of agricultural products. Monetary policy can have a role in insuring that relative price changes do not alter inflation expectations. Rising inflation expectations could make it difficult to achieve a moderate and acceptable inflation rate over the medium term. Historical experience with supply shocks Supply shocks are not unique to this period.