Thedéen: Difficult monetary policy trade-off in the event of supply shocks

The conflict in the Persian Gulf is causing a negative supply disruption to the world economy. Supply shocks increase companies’ costs and constrain output, dampening economic activity while increasing inflationary pressures. “For central bank policy-makers, supply shocks are more difficult to handle than demand shocks, as a trade-off has to be made between curbing inflation and supporting demand.”

Disruptions related to war and increased geopolitical risks often have more far-reaching effects than other supply shocks and often lead to higher global inflationary pressures. The Gulf disruption also affects many products and industries, not just oil and gas. Mr Thedéen went on to emphasise, in the current situation, the uncertainty is particularly high. 

“Even if a formal agreement on the opening of the Strait of Hormuz were to materialise relatively soon, inflationary pressures and high energy prices will not level off at the stroke of a pen. My overall view is that the risk has risen somewhat that inflation could be higher than we expected a few weeks ago. At the same time, our low inflation starting point means that we have some scope to try to get a clearer picture of the economic consequences.”