Introduction on monetary policy Riksdag Committee on Finance

Introduction on monetary policy Riksdag Committee on Finance 18 September 2012 Governor Stefan Ingves

Perspectives on monetary policy n Sweden’s economy has coped well throughout the financial and debt crises n The inflation target has served as a foundation for monetary policy n A lowered interest rate counteracts low inflation and supports economic activity

Sweden has coped well in a turbulent international situation

The financial crisis – dramatic fall in GDP, followed by strong recovery in Sweden GDP level Note. Index, 2007 Q 4=100. Sources: The OECD, Statistics Sweden and the Riksbank

From financial crisis to debt crisis in Europe Sovereign debts in various countries Note. Public gross debt as a percentage of GDP Broken lines represent the IMF’s forecast. Source: IMF

Improvements from the 1990 s in Sweden n Strong growth in productivity n Reform of fiscal and monetary policy n n Stable public finances Low and stable inflation

Sweden’s economy is holding up well

Strong GDP growth 2010 and 2011 in various regions and countries Note. Annual percentage change. Sources: Bureau of Economic Analysis, Eurostat, IMF and Statistics Sweden

Large current account surplus in Sweden Current account balance 2011 Note. Percentage of GDP Source: IMF

Resilient Swedish labour market Unemployment, per cent Sources: Bureau of Labor Statistics, Eurostat and Statistics Sweden

Low loan losses in Swedish banks Note. Summed up over four quarters, SEK billion, fixed prices, March 2012. Broken lines refer to the Riksbank’s forecast in Financial Stability Report 2012: 1. Sources: Bank reports and the Riksbank

Recent appreciation of the krona Trade-weighted exchange rate, TCW index Note. Index, 18 Nov 1992 = 100 Source: The Riksbank

Perspectives on monetary policy and the inflation target

Lower and more stable inflation Inflation in Sweden 1970 -2012 Note. Annual percentage change of the CPI Source: Statistics Sweden

The inflation target and inflation in figures n January 1993: Inflation should be 2 per cent as of 1995, measured in terms of the CPI n CPI inflation 1995 -2011: 1. 5 per cent* n CPIF inflation 1995 -2011: 1. 8 per cent* n Over half of the deviation from 2 per cent in CPI inflation can be explained by a falling interest rate trend *Measured using ’real-time data’, that is without reference to the change in calculation method introduced in 2005

Confidence in the inflation target Actual and expected inflation, per cent Note. Inflation measured by CPI. Expectations refer to money market agents. Sources: Prospera Research and Statistics Sweden

Unemployment reflects structural problems Unemployment and output gap, per cent Note. Output gap according to the production function approach. Sources: Statistics Sweden and the Riksbank

The financial crisis a reminder of the risks on the housing and credit markets Real housing prices in various countries Note. Index, 1996 Q 1=100. Source: Reuters Eco. Win

The Riksbank has warned of the risks in the Swedish housing market Real housing prices in various countries Note. Index, 1996 Q 1=100. Source: Reuters Eco. Win

Household debt must be monitored carefully Household debt and post-tax interest expenditure, per cent of disposable income Note. Broken lines refer to the Riksbank’s forecast in Financial Stability Report 2012: 1. Sources: Statistics Sweden and the Riksbank

Risks must be taken into account Risks on the credit and housing markets must be taken into account in monetary policy n Other measures: macroprudential policy instruments, amortisation requirements, increased housing supply… n But few of these are in place at present n The principle of prudence has been successful n

Current monetary policy A lowered interest rate counteracts low inflation and supports economic activity

Weak developments in euro area GDP, annual percentage change Sources: Bureau of Economic Analysis, Eurostat and the Riksbank

Growth will slow down in the period ahead GDP, quarterly changes in per cent calculated as an annual rate, seasonally-adjusted data Sources: Statistics Sweden and the Riksbank

Stronger krona Competition-weighted nominal exchange rate Note. TCW, Index, 18 Nov 1992 = 100 Source: The Riksbank

Labour market hindered by weak growth Unemployment Note. Per cent of labour force, ages 15 -74, quarterly data, seasonallyadjusted Sources: Statistics Sweden and the Riksbank

Lower inflationary pressures Weaker growth in the period ahead n Positive development of productivity n Stronger krona n

Lower repo rate… Note. Per cent, quarterly averages Source: The Riksbank

…counteracts excessively low inflation Inflation measured in terms of the CPI and the CPIF Note. Annual percentage change. The CPIF is the CPI with a fixed mortgage rate Sources: Statistics Sweden and the Riksbank

Household sector borrowing is increasing at a slower rate Lending to households and companies Note. Annual percentage change. Source: Statistics Sweden

A forecast, not a promise The repo rate Note. Per cent, quarterly averages Source: The Riksbank

n Sweden’s economy has coped well throughout the financial and debt crises n The inflation target has served as a foundation for monetary policy n A lowered interest rate counteracts low inflation and supports economic activity