LO economist 'no longer understands' Riksbank

TT/The Local
TT/The Local - [email protected]

A speech by Riksbank Governor Stefan Ingves to Swedish Trade Union Confederation (LO) economists did little to shed light on the bank’s decision making process.


Following the speech, LO’s head economist Dan Andersson remained unsure of the Riksbank’s motives.

“I realize now that I no longer understand how the Riksbank thinks,” he said.

The Riksbank came under fire last week after its surprise decision to raise interest rates.

Criticism was directed not only at the move itself, which many analysts believed was unwarranted due the weakening of the US economy, but also because the Riksbank wasn’t forthcoming in its prognosis prior to announcing the decision.

As a result, the rate hike caught most analysts by surprise, riling the markets and causing short term rates to rise steeply.

But the conversation between LO economists and Ingves on Thursday did little to increase their understanding of the situation.

“I thought I understood how the Riksbank thoguht, but I realize that I no longer do. I can’t figure out what it is that drives Riksbank interest rate decisions,” said Andresson.

The Riksbank justified last week's move by pointing to higher inflation expectations.

But Andersson doesn’t believe that the heightened expectations constitute a big risk.

The expectations are more a reflection of how higher prices for oil and food might affect inflation in Sweden. But those price rises won’t be affected by the Riksbank’s main interest rate.

“The Riksbank is using circular reasoning here. Inflation expectations are based primarily on what happens globally,” said Andersson.

Ingves said as well after the meeting that higher inflation expectations were an important part of the decision to raise the repo rate.

“If expectations were to rise steeply as they did in the 1970s and 1980s, we would perhaps need to wage another costly battle to bring inflation down once again,” he said.


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