urban backstrom : the monetary policy situation in sweden speech by mr urban backstrom, governor of sveriges riksbank, to the riksdag ’ s finance committee, stockholm, 17 october 2002. * * * first i want to express my thanks to the members of the finance committee for the invitation to discuss the swedish economy and monetary policy. as this looks like being the committee ’ s last public hearing in which i shall be participating as riksbank governor, i want to take the opportunity of expressing my thanks for all the occasions the riksbank has been given over the years of coming here and talking about monetary policy. by my count, this is the fourteenth time i have had such an opportunity. it was also customary earlier for the riksbank governor to appear before the committee but those meetings were closed. it was therefore with great pleasure that i received the first invitation, in spring 1994, to have a public dialogue with the members of the finance committee. a monetary policy that is conducted with an inflation target and a variable exchange rate is a policy based on assessments. and as assessments are always debatable, they need to be discussed. so what could be more natural than that these discussions are held at least twice a year with representatives for the riksbank ’ s principal in this committee. the picture is not as bright as last spring at the time of my previous meeting with the committee, our discussion was coloured by some relief that the effects of the terrorist attacks on 11 september 2001 had not had a particularly marked impact on the world economy. the uncertainty among firms and households had subsided to some extent and there were signs that economic activity abroad was beginning to improve. an optimistic mood was spreading. order books seemed to have stabilised and in some cases had even taken a turn for the better. moreover, an expansionary economic policy in many countries was expected to provide an additional stimulus. at the same time, i pointed out that we could not be entirely certain that world economic activity would pick up. among other things i mentioned that the economic imbalances in the united states were still large and stock market valuations were high. so there were a number of questions as to whether demand would in fact rise on a broad front. last spring, the moderate economic slowdown in sweden had meant that inflation here remained high and resource utilisation was still tight. gdp growth seemed to have bottomed out during the summer of 2001. unemployment had stopped falling. inflation had been

at present despite the economic slowdown. together with the cautious recovery, this suggests that the path of inflation in the coming years will be relatively stable. in the main scenario we count on underlying inflation ( und1x ) being 1. 8 per cent one year ahead and 1. 9 per cent after two years. as always, the spectrum of risks around this main scenario is also relevant for the formation of monetary policy. the financial market developments have, as i mentioned, heightened the uncertainty about the extent to which the stock market fall and poor earnings prospects are tending to subdue consumption and investment abroad and in sweden. it is conceivable that the fall to date will dampen consumption more than the main scenario assumes. if the international stock markets were to continue their negative development, or if the effects of the fall become more extensive, the outcome for the swedish economy could be considerably less favourable. such a situation would also entail lower inflation. this downside risk is only partly balanced by a domestic upside risk to do with inflationary pressure and wage formation in sweden. all in all, the balance of risks for inflation is accordingly on the downside. the riksbank ’ s overall assessment today is that with the risk spectrum taken into account, inflation one to two years ahead will be approximately in line with the target, albeit somewhat on the low side. the most probable outcome in the years ahead continues to be that economic activity becomes stronger. together with the difficulties in assessing the situation - not least on account of the fluctuations in the financial markets - this has led the riksbank to opt at present for leaving the repo rate unchanged. but the financial market developments and their economic effects warrant close attention. the executive board therefore decided to hold an extraordinary monetary policy meeting at 1 p. m. on 14 november in order to make a renewed judgement.