Erik Thedéen: Committee on Finance hearing on monetary policy
Things are going in the right direction, inflation is falling, but price pressure remains too high in the economy. That was the message from the Executive Board when they took part in this year's second hearing at the Riksdag Committee on Finance on current monetary policy on Tuesday. Governor Erik Thedéen and First Deputy Governor Anna Breman began by making presentations prior to the hearing.
Date: 17/10/2023 09:00
Speaker: Governor Erik Thedéen
Place: The Committee on Finance
We need to ensure that we regain purchasing power
Erik Thedéen, governor.
Erik Thedéen summarised the motives behind the current monetary policy. He emphasised that the strong upturn in inflation last year was due to both global supply shocks and strong demand in the Swedish economy. The supply disruptions resulted in large increases in costs for companies. The unexpectedly strong demand associated with the recovery after the pandemic allowed companies to pass these costs on to consumer prices to a greater extent than normal. And the price increases spread widely throughout the economy. In addition, the weak krona has contributed to the upturn in inflation.
“When inflation rises sharply, it is important that monetary policy reacts to avoid the economy being stuck in a situation where high inflation begins to appear normal. The fact that the Riksbank has gradually raised the policy rate is dampening inflationary pressures in the economy,” said Mr Thedéen.
“We can see that the interest rate increases are having an effect. Inflation is falling and that is welcome. But the fall in CPIF inflation is also largely due to a sharp fall in electricity prices. Underlying inflation, which usually provides good guidance on where inflation is heading, is still too high.”
The Executive Board's forecast from the interest rate decision in September indicates that the policy rate may need to be raised somewhat further. As before, Mr Thedéen pointed out that new information and how it affects the outlook for the economy and inflation determine the monetary policy stance.
“In tough times, the economic policy frameworks are challenged. We understand that it is noticeable when interest rates rise. But the cost of a permanently too high inflation rate is significantly higher. We need to ensure that we regain purchasing power,” concluded Erik Thedéen.
Good conditions for inflation to fall – but considerable uncertainty
Anna Breman also welcomed the fall in inflation. ”Inflation is on the way down. But we need a broad fall in inflation to achieve sustainably low and stable inflation.”
She said that there are good conditions for inflation to continue falling. Producer prices have fallen sharply, the social partners have shown responsibility and inflation expectations are stable.
“But we need additional scope for potential setbacks, and it will be important to analyse how new information affects the outlook for the economy and inflation.”
Ms Breman highlighted three areas that she believes will be important to follow: household consumption and saving, labour market developments and companies’ pricing behaviour.
“What determines the direction of monetary policy at future meetings will be our overall assessment of where inflation is heading. Monetary policy needs to be clearly contractionary for a period to come for us to return to sustainably low and stable inflation. This is important, because it enables increasing real wages, competitive companies and increased welfare.”