Bunge: Inflation on the way down, but weak krona contributing to uncertainty
“Monetary policy is working and inflation is on the way down. But it is much too early to say that we are done fighting inflation. There is still a risk for setbacks and a weak krona is part of this.” This was said by Deputy Governor Aino Bunge at the Swedish Association of Corporate Treasurers in Stockholm, where she was invited to talk about the economic situation and the Riksbank's view of the krona.
Date: 11/12/2023 13:00
Speaker: Deputy Governor Aino Bunge
Place: Industrins Finansförening
In recent months, inflationary pressures have been subdued and consumer prices have risen at a slower rate than before. “This is good news, but changes over shorter periods can vary a lot. To assess future inflation developments, we need to continue to monitor a broad set of inflation indicators, as well as economic prospects.”
Monetary policy is having a tightening effect and demand is falling in Sweden. “The signals we have received indicate that this has made it more difficult for companies to raise prices and price plans have been revised down. However, it is vital that these plans also continue to be confirmed in actual price developments,” said Ms Bunge.
Exchange rate matters for the development of inflation
According to Ms Bunge, the weak krona also contributes to uncertainty regarding inflation. “The Riksbank does not have a target for the krona, we have a target for inflation. But the exchange rate affects the outlook for inflation and therefore we need to monitor it closely.”
Moreover, when inflation is high, it seems easier for companies to shift cost increases from the exchange rate to consumer prices, commented Ms Bunge, referring to the Riksbank's studies in the most recent Monetary Policy Reports.
Many, including the Riksbank, consider that the krona is undervalued. Economic conditions in Sweden relative to the rest of the world – with strong government finances, a resilient labour market and good competitiveness – indicate that the krona will strengthen. “If speculation has contributed to weakening the krona in recent years, it may mean that it can strengthen relatively quickly once there is a turnaround, and investors take new positions based on the trend being broken. Maybe we are already there. The krona has recently strengthened. But it is still weak and our forecast is that it will strengthen further.
Ms Bunge thus sees continued risks for inflation: “There is, of course, a lot of evidence that inflation will continue to fall. But it is too early to say that we are done fighting inflation. There is still a risk for setbacks and a weak krona is part of this. Inflation must go all the way down to the target of 2 per cent, and we must live up to the strong level of confidence economic agents have in the inflation target.”