Flodén on the economic situation and monetary policy

News “Inflation is heading in the right direction, but there is still a long way to go and monetary policy will probably need to remain tight for a fairly long period to come.” These comments were made by Deputy Governor Martin Flodén, speaking about the economic situation and monetary policy at DNB in Stockholm today.

Martin Flodén, Deputy Governor.

Martin Flodén, Deputy Governor.

During the summer, the labour market has remained strong, while GDP growth and economic indicators have been weaker. “Earlier this year, we were continuously adjusting up the forecasts for GDP, as developments were stronger than expected. Now, after the summer, it looks as though the economic outlook instead needs to be revised down. But in the next few days, we will receive more information that needs to be analysed before we draw conclusions for our new forecasts and for monetary policy.”

Inflation is still far too high

While the economic outlook has been weaker than expected, inflation has largely been in line with the Riksbank's June forecast. “Inflation is heading in the right direction, but there is still a long way to go.”

There has been some mention in the debate that the problem with inflation has already been solved, that statistics read in a certain way show that inflation is now at the target level. Mr Flodén considered that this was incorrect. “While it is true that the average price level has risen slowly in recent months, this is due to the fall in energy prices. Prices of other subcategories behind average inflation are still rising too quickly. This applies in particular to service prices, and they have a clearer correlation to future inflationary pressures than energy prices.”

The weak krona is a problem

One worrying factor in this context is the weak krona, claimed Mr Flodén. “It risks contributing to continued high inflationary pressures. The weakness seems to be linked, for instance, to trend-following behaviour, concern regarding the Swedish property sector, the geopolitical situation and the image of Sweden, as well as the expectation that the Riksbank will raise the interest rate less than other countries. But in my opinion, none of this can justify the size of the krona depreciation. There are also many strengths in the Swedish economy, and the krona will reasonably strengthen in the future.”

It takes perseverance to go the whole way

“Although inflation has been in line with the Riksbank’s forecast, I think the summer has been eventful. We have a lot of new information to analyse during the three weeks leading up to the next monetary policy meeting. Moreover, further important information, particularly the inflation figure for August, will be published before then. It is therefore too early to say what all this means for the next interest rate decision. But as inflationary pressures remain high, monetary policy will have to be tight for a fairly long period to come.”

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Updated 28/08/2023