Introduction on monetary policy Riksdag Committee on Finance 18 November 214 Governor Stefan Ingves
Today's presentation Where have we come from? Inflation is low in Sweden In the euro area, both growth and inflation are low Relatively good GDP and employment growth in Sweden Where are we going? A low repo rate for a long time strengthens economic activity and contributes to that inflation rises towards the target Important questions A world out of step how does this affect Sweden? A low repo rate contributes to higher inflation but also to increased risks
Inflation is low Annual percentage change 5 4 CPIF CPI 5 4 3 3 2 2 1 1-1 -1-2 2 4 6 8 1 12 14-2 The CPIF is the CPI with a fixed mortgage rate. Source: Statistics Sweden
Several factors explain low inflation The CPIF, annual percentage change 3, 2,5 2, 1,5 Exchange rate Costs and markup Energy Food 1,,5, -,5 9 1 11 12 13 14 The CPIF is the CPI with a fixed mortgage rate. Sources: Statistics Sweden and the Riksbank
Goods prices falling and services prices increasing marginally Annual percentage change Broken lines refer to average since the year 2. Source: Statistics Sweden
Weak and uncertain demand and increasing competition have led to low price add-ons 7% 6% 5% 46% 4% 36% 3% 2% 1% 7% 1% % Much lower than normal Somewhat lower than normal As normal Somewhat higher than normal % Much higher than normal The Riksbank's survey on company pricing: Responses to question on companies' price increases over past 12 months. Source: The Riksbank
Low inflation abroad, too Annual percentage change For the euro area inflation is measured as the HICP and for the USA as the CPI. For Sweden the CPIF is shown. The CPIF is the CPI with a fixed mortgage rate. Sources: Bureau of labour statistics, Eurostat and Statistics Sweden
Growth in the euro area is still weak GDP, annual percentage change Seasonally-adjusted data. The KIX is an aggregate of the countries that are important to Sweden's international transactions. Sources: Bureau of economic analysis, Eurostat and the Riksbank.
The Swedish economy has developed relatively well GDP in different regions and countries, index, 27 Q4 = 1 Index, 27 Q4 = 1 Sources: Bureau of economic analysis, Eurostat, Office for National Statistics and Statistics Sweden
Relatively high employment rate Per cent of population aged 15-64 75 75 72 72 69 69 66 66 63 United Kingdom United States Euro area Sweden 6 5 6 7 8 9 1 11 12 13 14 63 6 Sources: Eurostat and the OECD
Today's presentation Where are we going? A low repo rate for a long time strengthens economic activity and contributes to inflation rising towards the target
Weak exports, but strong households in Sweden Exports, annual percentage change Consumption, annual percentage change Seasonally and calendar-adjusted. The broken blue line represents the average for the period 1994 Q1 214 Q2. Sources: Statistics Sweden and the Riksbank
Swedish economy continuing to develop relatively well GDP, annual percentage change 8 6 4 KIX United States Euro area Sweden 8 6 4 2 2-2 -2-4 -4-6 -6-8 8 9 1 11 12 13 14 15 16 17-8 Seasonally-adjusted data. The KIX is an aggregate of the countries that are important to Sweden's international transactions. Sources: The Bureau of Economic Analysis, Eurostat, national sources and the Riksbank
Continued labour market improvement Employment rate Unemployment rate Per cent of population and labour force respectively, aged 15-74 Sources: Statistics Sweden and the Riksbank
Low but rising inflation Annual percentage change Sources: Statistics Sweden and the Riksbank
Important to have firmly-anchored inflation expectations Annual percentage change 5 4 Inflation expectations CPI 5 4 3 3 2 2 5 years 1 1 year 2 years 1-1 -1-2 95 5 1 15-2 Inflation expectations according to money market participants. Sources: Statistics Sweden and TNS SIFO Prospera
Low repo rate over a long period of time Per cent Forecast refers to quarterly mean values, outcome refers to daily data. Source: The Riksbank
Lending rates to Swedish households and companies are relatively low Household Per cent 7 7 Companies Per cent 8 United Kingdom 8 6 6 7 Euro Area Sweden 7 5 5 6 United States 6 4 4 5 5 4 4 3 3 3 3 2 United Kingdom 2 2 2 1 United States Euro Area 1 1 1 Sweden 6 7 8 9 1 11 12 13 14 6 7 8 9 1 11 12 13 14 Lending rates to households refer to MFI's interest rates on new loans with housing as collateral. Lending rates to companies refer to MFI's interest rates on new loans to non-financial companies. Sources: The Bank of England, the ECB, the Federal Reserve and Statistics Sweden
Today's presentation Important questions A world out of step how does this affect Sweden? A low repo rate contributes to higher inflation but also to increased risks
Global interest rates have been falling for a long time Long-term nominal interest rates 18 16 United Kingdom United States Germany Sweden 18 16 14 14 12 12 1 1 8 8 6 6 4 4 2 2 6 65 7 75 8 85 9 95 5 1 Government bonds with approximately 1 years left to maturity. Source: Macrobond
Forward rates, as per 214-1-28, have been adjusted for risk premiums. For Sweden, the Riksbank's forecast for the repo rate in October is shown. Sources: Macrobond and the Riksbank A world out of step how does this affect Sweden? The repo-rate path and market expectations of policy rates abroad Per cent
Households' total debts as a share of their disposable incomes, totalled over the past 4 quarters. Sources: Statistics Sweden and the Riksbank Household debts continuing to grow Per cent of disposable income
Major differences in indebtedness between groups of households Per cent of disposable income 7 7 6 6 5 5 4 4 3 3 2 2 1 1 All, even non-indebted Only mortgage borrowers Very highly indebted mortgage Mortgage borrowers are based on the Riksbank's credit data from July 213. Very highly indebted mortgage borrowers refer to the ninetieth percentile. All, even non-indebted refers to the aggregate debt ratio calculated on Statistics Sweden data from 213 Q2. Sources: Statistics Sweden and the Riksbank
In countries where housing prices fell during the crisis, consumption also declined 15 Norway 1 Canada Percentage change, private consumption 27-212 Sweden 5 Finland -4-3 -2-1 1 2 Denmark The Netherlands United Kingdom -5 Spain Ireland -1 Percentage change, Real house prices, 27-212 Sources: Reuters EcoWin, Bank of Canada and the Riksbank
Risks associated with household indebtedness must be managed A long period of low repo rates will contribute to higher inflation But simultaneously increase risks in the economy Measures in other policy areas needed
Economic activity improving but inflation is too low Zero repo rate until mid-216