Sharply decreasing inflation led to the biggest interest rate cut in the Swedish central bank’s history, explains Leif Pagrotsky.
Question: What led to the Riksbanken’s decision to cut interest rates?
Pagrotsky: Until a few months ago, we had a problem of rising inflation expectations among the Swedish public, and decision makers in the business community were preparing for higher inflation, wage negotiations were preparing for higher inflation, and the economy was perhaps set for a higher level of inflation, so the Central Bank reacted by raising the interest rates to demonstrate to the economic agents in the country that this was not to be tolerated, but what has happened now is that international prices have come down. The oil price is down $100 in a few months, and the raw material prices, food prices are on the way down. It’s a totally different situation. The impulses that produce inflationary expectations in my country are not longer there. The board of directors in the Central Bank took notice of this. They said now the threat of inflation is gone, the economy is in a very sharp fall, and there is instead now possibilities of very, very low inflation, so there’s no need to have a higher interest rate anymore, so they made a totally different assessment, and that has, after having cut interest rates by another 100 bases points about a month ago, another 175 today was [welcomed] and I think a well motivated step.