Introduction on monetary policy Riksdag Committee on Finance 18 September 2012

1. Introduction on monetary policyRiksdag Committee on Finance18 September 2012 Governor Stefan Ingves

2. 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

3. Sweden has coped well in a turbulent international situation

4. The financial crisis – dramatic fall in GDP, followed by strong recovery in SwedenGDP level Note. Index, 2007 Q4=100. Sources: The OECD, Statistics Sweden and the Riksbank

5. 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

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

7. Sweden’s economy is holding up well

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

9. Large current account surplus in SwedenCurrent account balance 2011 Source: IMF Note. Percentage of GDP

10. Resilient Swedish labour marketUnemployment, per cent Sources: Bureau of Labor Statistics, Eurostat and Statistics Sweden

11. 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

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

13. Perspectives on monetary policy and the inflation target

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

15. 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

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

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

18. The financial crisis a reminder of the risks on the housing and credit marketsReal housing prices in various countries Note. Index, 1996 Q1=100. Source: Reuters EcoWin

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

20. Household debt must be monitored carefullyHousehold debt and post-tax interest expenditure, per cent of disposable income Sources: Statistics Sweden and the Riksbank Note. Broken linesreferto the Riksbank’sforecast in FinancialStabilityReport 2012:1.

21. 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

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

23. Weak developments in euro areaGDP, annual percentage change Sources: Bureau of Economic Analysis, Eurostat and the Riksbank

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

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

26. Labour market hindered by weak growthUnemployment Note. Per cent of labour force, ages 15-74, quarterly data, seasonally-adjusted Sources: Statistics Sweden and the Riksbank

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

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

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

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

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

32. 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