urban backstrom : sweden ’ s economy is slowing down speech by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, to the social democrats, harnosand, 20 august 2001. * * * thank you for the invitation to discuss economic developments in sweden here in harnosand. first let me say that conducting monetary policy in the past year has not been exactly easy. the repo rate was raised 0. 25 percentage points last december, from 3. 75 to 4. 0 per cent, and this has been followed by an equally large increase to the present rate of 4. 25 per cent. in june, moreover, the riksbank intervened in the currency market in an endeavour to strengthen the swedish krona and thereby avert a threat to the 2 per cent inflation target. this evening i shall be attempting to present the riksbank ’ s actions as i see them in a wider perspective and convey my view of the challenges we will be facing. before doing so, however, i want to underscore that a decision by the riksbank to raise or lower the repo rate does not always appear completely self - evident. in order to avoid an unduly erratic monetary stance, these decisions have to be based on assessments of developments in the period one to two years ahead. the current consensus is that this is approximately the time it takes for an interest rate adjustment to exert its full effect and influence the economy in the desired direction. one alternative might be to act in relation to a shorter time horizon, which would oblige us to adjust the interest rate more markedly as well as more frequently. both i and many others believe that would be bad for output and employment. as we all know, assessing the future is difficult and the predictions can almost always be questioned and debated. interest rate decisions by the riksbank ’ s executive board are preceded by extensive discussions and our opinions sometimes differ. disagreements are obviously not intrinsically desirable but when a group of people have to decide about complex matters, they are liable to reach different conclusions at times. that happens in business and it also applies to economic policy. the difference is that the riksbank is an open institution, which means that our task - masters - ultimately the swedish nation - can, from the minutes of our meetings, see the basis for a decision, the preceding discussion and the positions board members have taken

accounts are admittedly preliminary but the tendency behind them is clear : gdp growth fell back from an annual rate of 3 - 4 per cent in recent years to just under 2 per cent in the first half of this year. thus, the world economic slowdown has helped to bring about a downward adjustment of demand growth in sweden towards the long - term path without the riksbank needing to lift the repo rate up to between 6 and 7 per cent, as the central banks in a number of other countries have been obliged to do. how does the krona come into it? but it is not only the interest rate that influences the development of demand and ultimately the rate of inflation. the exchange rate also plays an important part. among other things, a weak exchange rate tends to stimulate exports and other segments of swedish production that are exposed to international competition. that could limit the impact of an international economic slowdown. conversely, an appreciation of the krona can act as a brake and modify the pull from an economic improvement in the rest of the world. another effect of a weak exchange rate concerns the prices of imported goods and services, with the risk of a pass - through to consumer prices. in the 1970s and ’ 80s, currency devaluation was frequently used as an instrument for stimulating the economy. the development of demand was boosted via production for export at the same time as imported goods became more expensive. in time, however, inflation began to move up. now that sweden has a flexible exchange rate regime, things work somewhat differently. if the krona weakens and firms and households perceive this as a transient movement, the effect on inflation will not be as strong as before, when a currency write - down was seen as a more permanent measure. this has contributed, for example, to an import price pass - through to consumer prices in the 1990s that was smaller than earlier. but the magnitude of the effects on demand and inflation with a flexible exchange rate regime will obviously depend on how much the value of the krona changes. even with such a regime, a large shift - upwards or downwards - in the value of the krona will have some effect on demand and prices. since last summer the swedish krona has weakened by between 10 and 15 per cent relative to a weighted currency basket. all else equal and given that such a depreciation were to be permanent, the stimulus to the swedish economy would be fully equal to the effect on the united states economy of the federal reserve ’ s