Göran Hjelm: Monetary policy trade-offs and economic policy interactions in the face of supply shocks
Speech by Mr Göran Hjelm, Deputy Governor of the Sveriges Riksbank, at the Sveriges Riksbank, Stockholm, 22 May 2026.
Slides accompanying the speech
Today I would like to describe my view of monetary policy when supply shocks cause the prices of goods or services imported into Sweden to rise. These types of disruption were a major cause of the surge in inflation in 2022, and they are happening again now with the war in the Middle East.
The best way for monetary policy to deal with such supply shocks depends on the scale of the shocks and the current economic situation. In addition, there are two factors that are particularly important if the Riksbank is to be able to 'see through' increased inflation that is driven, for example, by temporarily high energy prices. The first is clear communication. The Riksbank needs to explain the nature of the shocks, their economic effects and why it is appropriate to allow a temporary increase in inflation. The second is that fiscal policy and wage formation do not increase the risk of a broad and persistent upturn in inflation. To avoid this, a well functioning interaction between the Riksbank, politicians and the social partners is necessary.
This interaction worked well in the years of high inflation, when both fiscal policy and wage formation acted responsibly, which made it easier for monetary policy to give consideration to the development of the real economy. At the same time, the shocks that preceded the years of high inflation were so widespread that monetary policy needed to be tightened to ensure that the economy did not lose confidence in the inflation target. The extent of the disruption caused by the war in the Middle East depends to a large extent on how long the conflict is expected to last, and there is considerable uncertainty about this. Thanks to the high credibility of the inflation target and low inflation and resource utilisation at the outset, the Riksbank can await further information on how developments may affect inflation and the real economy going forward.