Sweden Needs Inflation Overshoot as Jobs Lost, Svensson Says

Swedish central bank Deputy Governor Lars E. O. Svensson said policy needs to be set to allow inflation to overshoot the target as high unemployment risks becoming permanent in the largest Nordic economy.

The Riksbank’s repo rate should “at least come down to a level of 0.5 percent to begin with, then we will have to see if that will be enough or not,” Svensson told reporters today in Stockholm. “Experience shows that the krona would be a bit weaker and that export companies would manage better.”

Svensson last month argued for a deeper cut than the 0.25 percentage point move to 1 percent that the Riksbank delivered. The former Princeton University professor entered reservations against all rate decisions last year, saying a more expansionary policy will move inflation closer to the 2 percent target.

The krona was little changed at 8.6501 against the euro at 1:16 p.m. in Stockholm after having strengthened 2.3 percent om the past 12 months.

“If the krona is strong, all else equal, that’s yet another reason to lower the rate” even as inflation and unemployment are the most important arguments for further cuts, Svensson said. “It’s obvious that the economy would manage better in this very difficult, weak economy with a lower rate and a weaker krona.”

Sweden’s seasonally adjusted unemployment rose to 8.1 percent in November, from 7.7 percent the previous month, the Stockholm-based statistics office said last month. Sweden’s annual inflation rate was a minus 0.1 percent in December.

“When unemployment has been high over a long period of time and is becoming entrenched, we need a particularly expansionary monetary policy, a large demand for labor and an inflation rate that is temporarily allowed to overshoot the target,” Svensson said in a speech published today on the Riksbank’s website.

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