Karolina Ekholm: Monetary policy and the exchange rate Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, at a meeting, Stockolm, 12 January 2010. * * * I intend to begin today by talking about the background to the monetary policy decision made by the Executive Board of the Riksbank on 15 December last year and how I viewed the economic situation. The main part of my speech will focus on the Riksbank’s assessment of the krona exchange rate. I intend to discuss the role played by the exchange rate in a small, open economy like Sweden’s, and the difficulties in forecasting the exchange rate. The current situation and the monetary policy decision As you probably know, the Executive Board decided at our meeting on 15 December to hold both the repo rate and the forecast for the repo rate unchanged in relation to the previous monetary policy meeting in October. I shall not go into details regarding the forecasts on which our decision was based, but I will focus on some specific questions that have been important for the stance I took. The world economy has improved recently, and this benefits developments in the Swedish economy. Our most recent assessment contains an upward revision to the forecasts for GDP and employment, both in Sweden and abroad. However, I see a number of risks relating to international developments in the period ahead.
However, the importer must initially choose between raising the price in kronor to compensate for the higher purchase price and reducing the company’s own margins. Let us assume that the price Swedish cheese importer has to pay is set at 10 euro per kilo, and that the price set for customers in shops in Sweden is 120 kronor. The exchange rate is  2  BIS Review 3/2010  initially 10 kronor/euro. The purchase price thus corresponds to 100 kronor per kilo. The Swedish importer thus has a profit margin of 20 per cent of the purchase price. 1 If the krona depreciates by 15 per cent, to 11.5 kronor per euro, the import price in kronor is 15 per cent higher, or 115 kronor per kilo. To retain a profit margin of 20 per cent of the purchase price, the price offered to customers in Sweden also needs to be raised by 15 per cent, from 120 kronor to 138 kronor per kilo. In this case the pass-through of the exchange rate to the price of the cheese will be complete, as both the exchange rate and the price of the cheese change by 15 per cent. However, this can be expected to lead to lower sales, as consumers may choose to buy, for instance, Swedish cheese instead of French. It is therefore not necessarily the most profitable pricing strategy. Another alternative for the importer is to hold the price in kronor completely unchanged.