Eva Srejber: Price stability and growth in Sweden  Speech by Ms Eva Srejber, Second Deputy Governor of the Sveriges Riksbank, at Skandinaviska Enskilda Banken, in Malmö, on 4 September 2000. *  *  *  Sweden is now entering its third year with growth of over 3%. This year, GDP is expected to increase by over 4% and our assessments indicate continued annual growth rates averaging over 3% for the next two years. Despite the strength of the economy, inflation is low. Why doesn’t inflation rise more? What balances do we have to strike as monetary policy decisionmakers? These are the issues that I want to give my view on in today’s speech. Monetary policy strategy I would like to start by drawing attention to what guides us when we make monetary policy decisions, ie how we have formulated the monetary policy strategy. The new Riksbank Act, that came into force on 1 January 1999, confirmed by law that the objective of monetary policy is price stability. This objective was formulated in 1993 as an inflation target, where CPI is to total 2% with a tolerance interval of plus/minus one percentage point. One reason for adopting CPI was because it is well-known and measures the prices consumers encounter for a large part of their consumption. Two per cent was chosen, among other reasons, because it was considered to be at a good European level at that time.
While the financial economy is in principle only a reflection of the real economy and vice versa, changes can take place as to which component is in the driving seat. A well-developed analysis of both sides would probably improve the basis for decision-making in monetary policy. Structural changes in the financial markets make it difficult to interpret developments and to find stable correlations between, for instance, the quantity of money and inflation, although this is true for many parts of the economy. It BIS Review 72/2000  2  applies, for instance, to methods for estimating such central variables as how many unused resources there are in the economy and how great the potential growth can be. Different methods then produce different results. The ECB is an example of a central bank that builds up its analysis from the real side and from the financial side - monetary policy rests on two pillars. There are partly historical reasons for monetary policy strategy being conducted in this way. Their strategy is perhaps not the best way to take financial trends into consideration. The risk with such a clear division is that the fact that it is actually about mirror images is disregarded and that the consistency between the real and financial analysis is lost. The advantage is that financial trends can clearly be taken into consideration when monetary policy decisions are made. In the second place, we can make different appraisals of the risk picture for the price trend during the forecast period.