Aino Bunge: Swedish economy must tolerate tightening interest rates
“Inflation targeting seems to have overcome the first really big challenge of high inflation. But even if we did quite well this time, the economy needs to become even more stable and function even better to avoid bigger problems next time the policy rate needs to be raised.” This was the message from Deputy Governor Aino Bunge, speaking at Fastighetsdagen today.
Date: 23/05/2024 09:05
Speaker: Deputy Governor Aino Bunge
Place: Fastighetsdagen Stockholm, Grand Hôtel
Aino Bunge, Deputy Governor.
In particular, Ms Bunge highlighted the crucial role played by debt linked to the housing and property market in increasing the resilience of the Swedish economy.
“Developments in the real economy could, in the worst case, have been much poorer, especially if the increase we saw in household and property company debt had continued for a few more years before inflation rose.”
We have not seen such a short-lived and high inflation peak as the one in 2022-2024 for more than 70 years. Inflation targeting seems to have passed the test quite well. Inflation is broadly back on target, with no excessive slowdown in the economy and no financial stability problems. It has now also been possible to cut the policy rate. But according to Ms Bunge, there are reasons to try to make the economy even more stable and better-functioning next time.
“It is not unlikely that in the future we will once again see periods of low inflation and low interest rates, interrupted from time to time by rising inflation and a policy rate that needs to be raised, possibly more than has been the case this time.”
Ms Bunge emphasised that we need to ensure that all sectors, including households and property companies, are resilient to be able to manage such developments.
“There must be conditions for monetary policy to do the job for which it has been given responsibility, without problems arising in some parts of the economy – and in the worst case in the financial system – as a result of behaviour that is too short-term and too risky.”
She pointed, for instance, to the need for policy reforms to reduce structural problems in the housing market, a macroprudential framework that includes non-banks, more transparency in how property companies value their properties and reliable credit ratings.
A better functioning housing and property market is very important for Sweden's future economic stability. It is not enough to have a low public debt, we also need to keep an eye on private sector debt.”