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

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 Sources: The OECD, Statistics Sweden and the RiksbankNote. Index, 2007 Q4=100.

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

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 Sources: Bureau of Economic Analysis, Eurostat, IMF and Statistics Sweden Note. Annual percentage change.

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

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 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 Note. Annual percentage change of the CPI 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 : 1.5 per cent* CPIF inflation : 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 Sources: Prospera Research and Statistics Sweden Note. Inflation measured by CPI. Expectations refer to money market agents.

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 Q1=100. Source: Reuters EcoWin

The Riksbank has warned of the risks in the Swedish housing market Real housing prices in various countries Note. Index, 1996 Q1=100. Source: Reuters EcoWin

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 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 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, seasonally- adjusted Sources: Statistics Sweden and the Riksbank

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

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

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