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Views on the Riksbank’s monetary policy communication, March 31, 2008

Views on the Riksbank’s monetary policy communication, March 31, 2008. Per Lindkvist Chairman of the Swedish Securities Dealers Association’s Board of Money Market and Bond Trading - Deputy General Manager, Danske Markets Sweden. The Board of Money Market and Bond Trading.

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Views on the Riksbank’s monetary policy communication, March 31, 2008

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  1. Views on the Riksbank’s monetary policy communication, March 31, 2008 Per Lindkvist Chairman of the Swedish Securities Dealers Association’s Board of Money Market and Bond Trading - Deputy General Manager, Danske Markets Sweden

  2. The Board of Money Market and Bond Trading Current members - trading department representatives from: • ABN AMRO • Danske Bank • Handelsbanken • SEB • Swedbank • Nordea • Öhman Fondkommission

  3. The Swedish Money and Bond Market • Common interest to have a well functioning market place • The monetary policy transmission mechanism moves through market rates • Sweden has a market maker driven market that has worked very well with high liquidity over time • Sweden is in comparison to other markets and monetary policy areas small – but with active domestic as well as international investors • Liquidity important to reduce SNDO and other issuers lending costs • Institutional investors need for risk adjustments and low transaction costs depends on bid/offer spreads and market turnover • Market functionality is important for the whole Swedish society - directly or indirectly

  4. General market situation and Monetary Policy Since summer 2007 - global market distress with lower liquidity and higher volatility in general In this environment, it is of most importance that Monetary Policy is characterized as transparent and predictable Communication is crucial in order to make the market functionality efficient Frequency between meetings is approximately 2 months – the clock does not stop in between and the pricing process is continuous Feb 13, 2008 publication of policy decision - an example

  5. Monetary Policy – publication Feb 13, 2008 • 100% in analyst poll expected policy decision to be on hold • Market prices - very high probability of unchanged repo rate • Escalated credit crisis, US economy downfall, massive Federal Reserve cuts, general decline in global economy considered important by market

  6. Why did prices move more than necessary? Obviously, the market did not interpret the Riksbank’s intentions correctly Nor did the Riksbank’s board members signal that the market was mispriced strongly enough Specifically, the market underestimated the analytical importance attached to the rise in inflation expectations by the Riksbank’s board Some additional communication might have created the following situation Uncertainty was expected regarding votes e.g. 2-4, 3-3 or the actual 4-2 among market participants A rational market would expect something between 0 and 25 bp e.g. 12.5 bp Prices would have been adjusted by 12.5 bp in the shortest maturities and much less than +/- 12.5 bp for longer maturities the day of publication compared to the actual >+20 bp parallel shift up to 2 years.

  7. Announcements of policy decisions and volatility

  8. Moving forward: The market maker community would like to see more communication between meetings In times of distressed markets and rapid changes, the need for communication between meetings increases A proposal is that individual board members should express their view on relevant new information as well as what type of factors they regard as important for their thinking – this should not be expressed nor interpreted as pre commitments in relation to near term policy decisions Irma Rosenberg’s latest speech when she did address development after the latest policy meeting is a definitely a step in the right direction – hopefully a start of an adjusted praxis within the current information policy!

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