Anna Breman: Tight monetary policy to ensure that inflation continues to fall towards the target

News “Inflation has fallen, and it is of utmost importance that the decline now continues as inflation is still far from the target. I will not tolerate high inflation becoming entrenched.” These were the words of First Deputy Governor Anna Breman, speaking at Swedbank in Stockholm today on the economic situation after the summer.

The labour market remains strong and the employment rate has risen further during the summer. However, GDP growth has been weak. In the parts that had previously performed particularly well, such as the manufacturing industry, the latest data show a decline in output. “The information we have received so far indicates that economic activity has been somewhat weaker than expected, while inflation has been largely in line with our forecasts,” Ms Breman pointed out.

Good prospects for falling inflation

Electricity prices have been low this summer and food prices are no longer rising as fast as they did last year. But service prices, which make up half of the CPI basket, are still rising at a rapid pace. This is to some extent due to technical factors, such as increased weighting for international travel in the CPI basket this year, but even disregarding these, the rate of increase is high. According to Ms Breman, for inflation to continue falling towards the target, the rate of increase must decline in all price categories, including services prices.

“Low and stable inflation is a prerequisite to see real wages and prosperity rise again. And there are good prospects for inflation to continue falling during the autumn. Inflation expectations are well-anchored, producer prices have fallen significantly and the social partners have shown responsibility when negotiating new wage agreements.”

Preparedness for other developments

At the same time, Ms Breman highlighted the developments in recent years, which clearly show that the Riksbank needs to be prepared to handle inflation developments that differ from the forecast. “There is still a risk that inflation will rise. The summer has been marked by geopolitical tensions, extreme weather and an ongoing war in Europe. This can affect goods prices, energy prices and food prices. Moreover, the krona is still weak. Although it has developed in line with our forecast during the summer, it counteracts the decline in inflation.”

“In June, we said that the policy rate may need to be raised at least once more this year for inflation to return to the target of 2 per cent. Our next monetary policy meeting is in just over a month, at the end of September. By that time, we will have received further information that could affect the economic outlook and inflation prospects. But it is already clear that monetary policy needs to be tightened for a significant period ahead,” concluded Ms Breman.

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Updated 17/08/2023