Introduction on
monetary policy
Riksdag Committee on
Finance
18 September 2012
Governor Stefan Ingves
Perspectives on monetary policy

Sweden’s economy has coped well
throughout the financial and debt crises

The inflation target has served as a
foundation for monetary policy

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
108
108
USA
Euro area
Sweden
104
104
100
100
96
96
92
92
07
08
Note. Index, 2007 Q4=100.
09
10
11
12
Sources: The OECD, Statistics Sweden and the Riksbank
From financial crisis to debt crisis in Europe
Sovereign debts in various countries
180
180
Grekland
Irland
Italien
Portugal
Spanien
Sverige
160
140
160
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
90
92
94
96
98
00
02
Note. Public gross debt as a percentage of GDP
Broken lines represent the IMF’s forecast.
04
06
08
10
12
14
Source: IMF
Improvements from the 1990s in Sweden

Strong growth in productivity

Reform of fiscal and monetary policy


Stable public finances
Low and stable inflation
Sweden’s economy is holding up well
Strong GDP growth
GDP growth 2010 and 2011 in various regions and countries
10
10
2010
9
9
2011
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Euro area
Note. Annual percentage change.
USA
Sweden
BRIC
Sources: Bureau of Economic Analysis, Eurostat, IMF and Statistics Sweden
Large current account surplus in Sweden
Current account balance 2011
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
Note. Percentage of GDP
Source: IMF
Resilient Swedish labour market
Unemployment, per cent
12
12
Sweden
Euro area
10
10
USA
8
8
6
6
4
4
2
2
0
0
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources: Bureau of Labor Statistics, Eurostat and Statistics Sweden
Low loan losses in Swedish banks
120
120
Profit before loan losses
Loan losses
100
100
80
80
60
60
40
40
20
20
0
0
-20
-20
90
92
94
96
98
00
02
04
06
08
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.
10
12
14
Sources: Bank reports and the Riksbank
Recent appreciation of the krona
Trade-weighted exchange rate, TCW index
160
160
150
150
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
60
80
82
84
86
88
90
Note. Index, 18 Nov 1992 = 100
92
94
96
98
00
02
04
06
08
10
12
Source: The Riksbank
Perspectives on monetary policy and the
inflation target
Lower and more stable inflation
Inflation in Sweden 1970-2012
16
16
CPI
14
14
Average 1995-2011
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
70
75
80
85
Note. Annual percentage change of the CPI
90
95
00
05
10
Source: Statistics Sweden
The inflation target and inflation in figures

January 1993: Inflation should be 2 per cent as of 1995,
measured in terms of the CPI

CPI inflation 1995-2011: 1.5 per cent*

CPIF inflation 1995-2011: 1.8 per cent*

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
5
Inflation expectations
5
CPI
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
94
96
98
00
02
04
06
Note. Inflation measured by CPI. Expectations refer to
money market agents.
08
10
12
14
16
Sources: Prospera Research and Statistics Sweden
Unemployment reflects structural
problems
Unemployment and output gap, per cent
12
12
Output gap
10
10
Unemployment
8
8
Unempoyment, average
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
80
82
84
86
88
90
92
94
96
98
00
02
Note. Output gap according to the production function approach.
04
06
08
10
12
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
300
300
Ireland
250
250
Spain
USA
200
200
150
150
100
100
50
50
0
0
80
82
84
86
Note. Index, 1996 Q1=100.
88
90
92
94
96
98
00
02
04
06
08
10
12
Source: Reuters EcoWin
The Riksbank has warned of the risks
in the Swedish housing market
Real housing prices in various countries
300
300
Sweden
Ireland
250
250
Spain
USA
Germany
200
200
150
150
100
100
50
50
0
0
80
82
84
86
Note. Index, 1996 Q1=100.
88
90
92
94
96
98
00
02
04
06
08
10
12
Source: Reuters EcoWin
Household debt must be monitored
carefully
Household debt and post-tax interest expenditure, per cent of disposable income
220
22
200
20
180
18
160
16
140
14
120
12
100
10
80
8
60
6
40
4
20
2
0
0
93
95
97
99
01
03
Debt ratio (left scale)
05
07
09
11
13
15
Interest ratio (right scale)
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
Other measures: macroprudential policy instruments,
amortisation requirements, increased housing supply…
But few of these are in place at present
The principle of prudence has been successful
Current monetary policy
A lowered interest rate counteracts low
inflation and supports economic activity
Weak developments in euro area
GDP, annual percentage change
6
6
4
4
2
2
0
0
-2
-2
The world
-4
-4
USA
Euro area
-6
-6
00
02
04
06
08
10
12
14
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
12
12
8
8
4
4
0
0
-4
-4
-8
-8
July
-12
September
-16
-12
-16
07
09
11
13
15
Sources: Statistics Sweden and the
Riksbank
Stronger krona
Competition-weighted nominal exchange rate
160
160
July
September
150
150
140
140
130
130
120
120
110
110
07
09
Note. TCW, Index, 18 Nov 1992 = 100
11
13
15
Source: The Riksbank
Labour market hindered by weak
growth
Unemployment
9
9
July
September
8
8
7
7
6
6
5
5
07
09
11
13
Note. Per cent of labour force, ages 15-74, quarterly data, seasonallyadjusted
15
Sources: Statistics Sweden and the Riksbank
Lower inflationary pressures
Weaker growth in the period ahead
 Positive development of productivity
 Stronger krona

Lower repo rate…
5
5
July
September
4
4
3
3
2
2
1
1
0
0
07
08
09
Note. Per cent, quarterly averages
10
11
12
13
14
15
Source: The Riksbank
…counteracts excessively low inflation
Inflation measured in terms of the CPI and the CPIF
5
5
CPIF
4
4
CPI
3
3
2
2
1
1
0
0
-1
-1
-2
-2
07
09
11
13
Note. Annual percentage change. The CPIF is the CPI with a fixed mortgage
rate
15
Sources: Statistics Sweden and the
Riksbank
Household sector borrowing is
increasing at a slower rate
Lending to households and companies
20
20
Companies
Households
15
15
10
10
5
5
0
0
-5
-5
-10
-10
99
01
03
Note. Annual percentage change.
05
07
09
11
Source: Statistics Sweden
A forecast, not a promise
The repo rate
7
7
90%
75%
50%
Outcome
Forecast
6
5
6
5
4
4
3
3
2
2
1
1
0
0
-1
-1
07
09
Note. Per cent, quarterly averages
11
13
15
Source: The Riksbank

Sweden’s economy has coped well
throughout the financial and debt crises

The inflation target has served as a
foundation for monetary policy

A lowered interest rate counteracts low
inflation and supports economic activity