The Riksbank raised its policy rate to -0.25% in December 2018, with actual and expected inflation close to the 2% target. Monetary policy remains very supportive and a gradual normalisation of interest rates is welcome given high capacity utilisation and the potential impact of a long period of very low interest rates on indebtedness, asset prices and resource allocation. Still, delaying further policy moves until inflation and growth prospects become clearer is appropriate.
Fiscal policy is expected to remain prudent over the projection period, with surpluses in excess of the target of ⅓ per cent of GDP over the business cycle. This stance is appropriate, given cyclical conditions, the need for budget buffers in an economy highly exposed to external shocks and where low policy rates limit room for monetary policy manoeuvre.
The economy is suffering from some structural weaknesses. The government is considering easing labour market regulations to increase flexibility and facilitate the hiring of low-skilled workers. The introduction of entry agreements, negotiated with the social partners and combining subsidised employment and education, should help better integrate immigrants and long-term unemployed in the labour market. Housing market inefficiencies affect affordability, macroeconomic and financial stability, and labour mobility. The government has taken measures to release land for development and speed up planning processes. It also plans to remove rent controls for new dwellings and to amend property taxation, but restoring affordability may require further and deeper reforms in the housing market.
