Breman: Inflation is falling, but we need to be prepared for setbacks

The Riksbank’s rate hikes are contributing to inflation coming down. Economic activity is slowing down and inflation is falling more or less in line with the Riksbank’s forecasts. The labour market is weakening, but employment remains high in both a historical and international perspective, Anna Breman said. “Our forecast is for activity in the Swedish economy to gradually increase towards the end of the year when inflation has fallen back and household income increases.”

Policy reform for a better functioning housing market is needed

While overall business investment has held up relatively well, inflation and rising financing costs have affected housing investment all the more. After having increased rapidly for many years, housing construction is falling sharply. “Construction investment is cyclical, especially housing. In Sweden, construction varies more than in many other countries,” Breman noted.

Several factors influence long-term developments in the housing market, including population growth, macroprudential policy and fiscal policy. The interest rate is also important although it is not decisive for long-term developments, Breman said. “Even though we have had similar policy rate levels in Sweden and the euro area in recent decades, housing prices have risen significantly more here than in Finland and Germany, for example. This shows that it is more than just the interest rate that matters. For our housing market to function better in the longer term, we need policy reforms in Sweden.”

Inflation is going in the right direction

Breman also commented on recent economic developments and current monetary policy: The fall in inflation is very welcome and it will contribute to Swedish households regaining their purchasing power. CPIF inflation is now just over 2 per cent. This is a broad-based decline in most price categories, but the large drop in inflation in December was mainly due to lower electricity prices compared to last year. Excluding energy prices, core inflation remains relatively high at just over 5 per cent year-on-year. Nevertheless, the latest outcomes indicate that the trend is in the right direction and that there is probably no need to raise the interest rate further.”

However, she also emphasised that the future is uncertain. “Inflation should not only fall to 2 per cent, it should be sustainably low and stable. The prospects for this are favourable. However, several factors can influence developments – not least corporate pricing behaviour, the exchange rate and geopolitical developments. Before our next monetary policy meeting on 31 January, we need to continue to monitor developments, assess various risks and be prepared to adjust monetary policy if inflationary pressures are higher or lower," Anna Breman concluded.