The importance of international developments for monetary policy
Sweden is a small, open economy that is affected by international events. This means that if the Riksbank is to formulate a monetary policy that contributes to a good development of the Swedish economy, it must have knowledge of international developments and forecasts of how the economies of Sweden's most important trading partners will develop. The way that international developments can affect the Swedish economy and monetary policy is described below.
Demand for Swedish export goods and services can affect inflation
When GDP growth abroad rises, there is also greater demand for Swedish export goods and services. This in turn can mean a larger demand for labour in Sweden, which makes wages rise faster and corporate expenditure increases. Companies may then need to raise their prices, which means that inflation may rise. A lower GDP growth abroad can on the contrary lead to subdued demand for Swedish exports and ultimately lower inflation.
Import prices are important for inflation
Swedish inflation is also affected by the prices of the goods and services that are imported. For instance, the prices of many commodities are set on a global market, where international demand determines the outcomes. Demand from abroad also affects the costs for the companies that manufacture Swedish import goods and this in turn affects pricing in these companies.
The exchange rate affects inflationary pressures.
If the Swedish krona appreciates, that is, rises in value in relation to other currencies, imported goods and services will be cheaper when calculated in SEK, which dampens inflation. At the same time, a stronger krona leads to lower demand for Swedish goods and services abroad, as the goods and services will become more expensive in domestic prices. When demand for Swedish exports declines, this can in turn lead to employment falling in Sweden and ultimately contributing to dampening inflation. The opposite applies if the krona instead depreciates, that is, declines in value in relation to other currencies.
International interest rates affect Swedish interest rates
In connection with every monetary policy decision, the Executive Board makes an assessment of the policy rate path needed, and any potential supplementary measures necessary, for monetary policy to be well-balanced. This assessment may need to take into account developments in international interest rates in several ways. For one thing, the trend for interest rates in Sweden can be affected by the same factors that govern developments in international interest rates. For another thing, a central bank in a small, open economy may need to take into account the actions of other central banks. If the Riksbank's monetary policy deviates substantially from that in other countries, this could have a considerable effect on the krona exchange rate, which could affect both inflation and growth in the Swedish economy, as pointed out above.
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