Current forecast for the repo rate, inflation and GDP
16 December 2014
The repo rate
Inflation is low and there has been a further slight fall in long-term inflation expectations. For inflation to rise towards the target sufficiently quickly and to reduce the risk of longer-run inflation expectations continuing to fall, monetary policy needs to become more expansionary. At its most recent monetary policy meeting in mid-December, the Executive Board of the Riksbank therefore assessed that the repo rate needs to remain at zero per cent for a somewhat longer period than previously forecast.
It is not until the second half of 2016, when CPIF inflation is close to 2 percent, that it will be appropriate to begin raising the repo rate. If monetary policy needed to become even more expansionary, this would primarily entail continuing to postpone a first increase of the repo-rate. The Riksbank is also preparing further measures that can be used to make monetary policy more expansionary. Such measures, were they necessary, could be presented at the next monetary policy meeting.
The Executive Board of the Riksbank normally makes decisions on the repo rate six times a year. At the same time, a forecast for the repo rate over the coming years, known as the repo-rate path, is published. The next monetary policy meeting is planned for 11 February, and the decision will be published on the following day, 12 February.
Repo rate with uncertainty bands
Per cent, quarterly averages
Inflation is low and the rate of price increase, above all for services, has continued to be significantly lower than the historical average. Falling oil prices are another contributory factor to the low rate of inflation.
Seen in a longer-term perspective, there are several explanations for the low inflation. Weak demand abroad has contributed to a slow rate of increase in international prices, there has still been spare capacity on the labour market and companies have found it difficult to pass on their cost increases to prices. There are indications in the Riksbank's Business Survey that inflation has been held back by low demand and increasing competition.
As economic activity abroad gradually improves, the demand for Swedish goods and services will increase. Together with a steady increase in domestic demand, this means that resource utilisation in the Swedish economy will gradually rise. The very low repo rate will contribute to this. Employment is growing and unemployment is falling back. During the latter part of the forecast period, wage increases are expected to become gradually higher and there should be greater scope for companies to raise their prices. All in all, there is good potential for inflation to rise in the coming years.
CPI inflation, which includes the direct effects of changes in interest rates, is currently very low, which is linked to the fact that the Riksbank has cut the repo rate substantially in recent years. When the Riksbank eventually begins to raise the repo rate, household mortgage rates will also rise, which will affect the CPI and mean that it rises faster than the CPIF. In periods of significant changes in the repo rate, the CPIF provides a better picture of inflationary pressures.
CPI with uncertainty bands
Annual percentage change
CPIF with uncertainty bands
Annual percentage change
Economic activity in Sweden continues to improve. GDP growth in Sweden was slower than normal in the third quarter, partly as a result of subdued consumption and exports. But indicators of future developments are at normal levels, which indicates growth in line with the historical average over the coming quarters. The low repo rate, together with rising demand abroad, is expected to lead to an increase in economic activity in Sweden.
It is estimated that GDP growth will be 2.6 per cent in 2015, 3.3 per cent in 2016 and 2.3 per cent in 2017.
GDP with uncertainty bands
Annual percentage change, seasonally-adjusted data
Notes and sources for the figures
The uncertainty bands show the 50, 75 and 90 per cent chances of the repo rate, inflation and GDP being within the respective range. The bands are based on historical forecast errors.
Sources: Statistics Sweden and the Riksbank.