Aino Bunge: Low and stable inflation creates predictability, also for pension funds
"Insurance and pension companies with long-term commitments to policyholders are very much affected by interest rates and inflation. The fact that inflation in February continued to fall in line with our forecasts provides greater confidence that inflation can be stabilised at the target, but there are still risks to this development." These comments were made by Deputy Governor Aino Bunge when she spoke today about the economic situation and monetary policy at a digital event with Folksam and KPA Pension.
Date: 15/03/2024 08:30
Speaker: Deputy Governor Aino Bunge
Place: Digital event by Folksam
The high inflation and rising interest costs in recent years have been challenging for many households and businesses. Insurance and pension companies are very much affected by a changing interest rate environment, both in terms of the return on assets, and also on the liability side when valuing obligations to policyholders.
"The pensions field is also an example where indexation based on inflation can have a major impact" said Ms Bunge. Normally, pensions are annualised, but this is done in different ways depending on the law and agreements.
"If the index linking is based on inflation and the price base amount, this may, as we have now seen for municipalities and regions, have major effects when inflation has been at its highest level in 30 years. Inflation now appears to be coming down towards the target. Stable inflation means that the upward adjustment of pensions based on the price base amount will also be more predictable."
According to Ms Bunge, the risk of high inflation becoming entrenched has decreased, and the latest inflation outcome for February shows that inflation is moving in the right direction.
“It was a good outcome. The fact that inflation is continuing to fall in line with our assessments creates greater confidence that inflation can be stabilised at the target. This is something we will bear in mind for the next monetary policy decision, when we make an overall assessment of future inflation prospects. We also need to take into account that there are still risks to inflation, linked to the geopolitical situation, for instance, but also to the exchange rate and Swedish companies’ pricing behaviour.”
Insurance and pension companies are also major investors in the Swedish financial market. And Ms Bunge showed how the Riksbank has reduced its securities holdings over the past year by selling government bonds.
“The sales are part of the normalisation of the Riksbank's balance sheet. They have increased the amount of safe and easily marketable assets in the Swedish government securities market, improved the functioning of the markets, and have also made it easier for foreign players to invest in Swedish assets, which is positive.”