Mr. Heikensten answers eight questions on monetary policy in Sweden Speech by the Deputy Governor of the Bank of Sweden, Mr. Lars Heikensten, at The Economics Association in Umeå on 19/2/98. Introduction During the 1990s monetary policy has been the subject of intensive discussion. This is not surprising, given the serious crisis in the Swedish economy at the beginning of the decade and the role that monetary policy played both then and as the crisis was building up. Since that time, monetary policy has had an explicit role to safeguard independently the value of money – a role that is new in Sweden in the post-war period. With a floating exchange rate, the decisions currently made by the Riksbank on its instrumental rate are very real and important to the behaviour of households and businesses and to economic growth. The monetary policy discussion has evolved over time. Questions and statements about monetary policy’s basic objective of price stability that were very frequent a couple of years ago are less so today. Understanding of the Riksbank’s actions seems to have increased. We are presently trying to evaluate this by asking the public how it views the Riksbank’s work and by following the media and newsletters written by the market’s players. It is also possible to form an opinion based on the market’s reactions to changes in the instrumental rates as to whether the policy is understandable.
And why, for countries where there have been larger and faster increases in household debt levels, recessions have tended to be deeper still. The Financial Policy Committee has already acted in response to the growing momentum in the housing market. As well as the general strengthening of bank capital, the FPC, in conjunction with other regulators and the Treasury, withdrew both the cheap funding and favourable capital treatment of mortgage lending introduced after the crisis to help support the housing market. And, we have asked the FCA that when lenders test whether prospective borrowers can afford, through time, the mortgages they seek they should bear in mind future Financial Policy Committee recommendation on the appropriate interest rate stress test to use in assessments of affordability. Whether and how to act further if, following the pause of the last couple of months, momentum continues to build will be the most challenging judgment the FPC will have to take in the coming months. The FPC’s response will depend on the nature of the risks to stability identified. The FPC’s powers of direction in relation to the capital banks and building societies bear most directly on mortgage lenders’ ability to weather a downturn and housing bust once it has emerged. Others, like the FPC’s powers to make comply or explain recommendations to the PRA and FCA could bear more directly on the crucial underwriting standards and affordability constraints like debt service to income, loan to income and loan to value.