Aino Bunge: Monetary policy must be forward-looking

The higher inflation is partly due to technical factors and rapid price increases in a few price categories. Demand in the economy remains weak and forward-looking indicators point to inflation being close to the target. “In our forecast, we expect inflation to slow down significantly over the next six months. The latest inflation outcome for September supports this view,” said Ms Bunge.

At the same time, we must expect large fluctuations in the measured rate of inflation in the coming years, not least as a consequence of the temporary reduction in VAT on food announced by the government. “My basic view is that the VAT cut will not change the picture of inflation beyond the short term and it is therefore something we should ‘look through’. But we need to monitor the impact on households’ and businesses’ expectations and behaviour.”

Economic activity – mixed signals

Ms Bunge stressed that the conditions are in place for a stronger economy: real wages are rising and households' purchasing power is increasing. There are also signs that the recovery is on slightly firmer ground. Consumption growth has picked up and firms are more optimistic, which is also reflected in higher output in both the manufacturing industry and services. “However, it is worrying that the labour market looks weak and we are still living in a very uncertain world,” said Ms Bunge. 

She concluded by emphasising the importance of remaining vigilant with regard to both economic activity and inflation: “It was important to be forward-looking and to cut the interest rate now. We still need to be able to act if developments differ from what we now see ahead of us. The risks to developments are balanced, which is also reflected in our forecast for the policy rate. Beyond external events, a key question is how households will react now that their purchasing power is increasing.”