Anna Breman: We need to continue to act to bring inflation back to the target

"Inflation is too high, it is too broad and it is hurting households and firms. The mandate we have been given by the Riksdag (Swedish Parliament) is to maintain price stability. For inflation to be low and stable again, we need to gradually raise the policy rate and reduce the Riksbank's asset holdings.” These comments were made by Deputy Governor Anna Breman when she spoke at Nordea's AAA seminar in Stockholm on Thursday.

Date: 09/06/2022 09:15

Speaker: Deputy Governor Anna Breman

Place: Nordea AAA seminar, Stockholm

The high inflation rate is due to a number of different disruptions in production and distribution worldwide, but also to strong demand as restrictions are lifted. “The Swedish economy has recovered quickly after the pandemic. Although there are risks to the outlook, the economy is performing well,” said Ms Breman. While firms are showing strong results and are optimistic about the future, households are much more pessimistic. “This doesn’t necessarily mean that households will put the brakes on and stop consuming, the labour market is still strong. However, they will probably keep a tighter grip on their wallets if they are worried about both the Swedish economy and their  own finances.”

At the same time, a higher interest rate impacts different parts of the economy to different extents. “The construction sector and the fast-growing tech companies are likely to notice the higher interest rates more than, for example, the manufacturing industry. Young people with a lot of debt are, on average, more sensitive to interest rates than older people with lower indebtedness,” continued Ms Breman.

“In addition to short-term cyclical effects, we also need to be aware of the major structural changes that are under way,” said Anna Breman, and mentioned in this context energy transition, digitalisation and the risk of deglobalisation. “These trends affect inflation and the functioning of the economy both in the short and long term, and are something we need to consider in our analysis”.

“There are always trade-offs in monetary policy; If we do too little, there is a risk that inflation will stick, if we do too much we risk triggering a downturn in the economy that could cause inflation to fall well below the target in the longer run.”

“At our most recent monetary policy meeting in April, I said that it is important to act now. Inflation expectations must not rise too far, and we need to counteract the risk of entering a price and wage spiral. I also said in April that I would have preferred somewhat fewer policy rate increases than indicated by the Riksbank's policy rate path. I wish to stress, as I did in the minutes, that it is extremely important that my assessment that fewer increases may be appropriate is not interpreted and/or misunderstood as tolerance for higher inflation in the medium term. If inflation goes even higher and becomes even more persistent than in our forecast, I will support doing what is necessary to attain the inflation target, including more rate hikes than are in the current path and/or a faster tapering of asset holdings.,” concluded Ms Breman.  

Updated 09/06/2022