A general assessment was that in the Swedish economy’s present cyclical phase, it is important that monetary policy does not remain expansionary for too long. Considering the time lag associated with monetary policy’s effects, a change to a less expansionary stance must be made in good time before resource utilisation becomes excessively high. The stated aim was that this would provide better conditions for more sustained increases in production and employment. Against this background, when the inflation report had been presented, the repo rate was increased in December by 25 basis points, from 4.10 to 4.35 per cent. In periods of financial unrest in international markets there is often a “flight to quality”; savers and investors experience uncertainty and rearrange their portfolios in favour of what are perceived as secure assets. In connection with the Mexican crisis in the spring of 1995, Sweden’s currency depreciated sharply and bond rates rose substantially; this amounted to a flight from Sweden. In view of the krona’s recent weakening tendency, it would be going too far to talk of a flight to Sweden but the fact remains that the situation differs from earlier occasions with international financial unrest. Even so, a correction of the present under-valuation of the krona would be a good thing. The conclusion from this is that the increased confidence which Swedish economic policy has earned in recent years must be nurtured continuously, not least to make us resilient to turbulent times.
At times during 1996 and 1997 the 12-month change figure for the CPI was below the tolerance interval’s lower limit of 1 per cent. On a number of occasions the Riksbank pointed out that this was mainly an effect of the repo rate cuts during 1996. In that it was not a question of more permanent effects and the inflation assessment pointed to a future increase, there was no need for further repo rate cuts. During the summer and autumn of 1997 inflation did, in fact, move up fairly rapidly, as expected, in that these transitory effects successively dropped out of the 12-month figures. As a result, actual inflation has moved closer to the underlying rate. In describing this tendency, the Riksbank has been far from alarmist. The latest inflation report This brings me to the future development of inflation and the current situation for monetary policy. Our December inflation report provides a natural point of departure. The assessment there was that during 1998 inflation would somewhat exceed the target, with a gradual acceleration to a rate of about 2.5 per cent in 1999. Underlying inflation was likewise expected to move up and reach just over 2.5 per cent at the end of 1999. This assessment was broadly in line with the more or less concurrent forecast from the National Institute of Economic Research, for example, as well as with the figures that forecasters in general presented last November and December.