Erik Thedéen: Monetary policy needs to be adapted cautiously

“Monetary policy has contributed to lower inflationary pressure in Sweden, and if the prospects for inflation remain favourable, the possibility of a policy rate cut during the first half of the year cannot be ruled out.” This comment was made by Governor Erik Thedéen today, when speaking at a seminar on the Swedish economy and monetary policy in connection with a visit to Eesti Pank, the Estonian central bank.

Date: 07/02/2024 10:30

Speaker: Governor Erik Thedéen

Place: Eesti Pank, Tallinn, Estonia

Erik Thedéen, governor

Erik Thedéen, governor.

Swedish inflation on firmer ground but risks remain

"Economic activity in Sweden is slowing down roughly in line with our expectations. Although the inflation outlook has improved recently, there are risks of setbacks, such as renewed supply shocks due to geopolitical concerns, companies’ pricing behaviour or a renewed sharp depreciation of the krona," said Mr Thedéen. “The adaptation of monetary policy must be cautious, to ensure that inflation is stabilised sustainably close to the target.”

Swedish banks have major operations in Estonia

Mr Thedéen noted that there are strong ties between Sweden and Estonia. The countries are not only geographically close but also have strong economic links. We have a lot of trade with one another, for example Sweden is Estonia's third largest trading partner. In addition, several major Swedish banks are active in Estonia.

Mr Thedéen also noted that the risks in the financial system in Sweden are partly linked to the fact that Swedish households are highly indebted and are therefore greatly affected by interest rate increases. Property companies are also under pressure from higher interest rates, as well as the major slowdown in the construction sector in recent years. In an unfavourable scenario, problems among property companies could spill over to the banks and affect financial stability. However, Mr Thedéen noted that the Riksbank's assessment is that Swedish banks are well-capitalised and should therefore be able to cope with major strains in the property sector.

In troubled times, cooperation is key

Mr Thedéen emphasised the importance of continued cooperation within the Nordic-Baltic countries, especially in these turbulent times. Russia’s illegal invasion of Ukraine and increased geopolitical tensions in the Middle East create considerable uncertainty over energy prices, food prices and freight prices going forward. In a period of uncertainty, there have also been large movements in the krona exchange rate. "We have no target for the exchange rate, but it is important because it affects inflation," observed Mr Thedéen.

Erik Thedéen also highlighted that Sweden and Estonia cooperate within the IMF's Nordic-Baltic constituency, as well as in newer forums such as the Nordic-Baltic Macroprudential Forum.

Updated 07/02/2024