Our inflation forecast therefore always includes an assessment of credit developments and the housing market. As I mentioned earlier, it may be difficult to quantify the risks linked to a rapid increase in house prices and indebtedness over a long period of time using our usual forecasting methods. As the expansionary monetary policy is to a large extent a driving force in developments in house prices and indebtedness, we have considered it reasonable in our monetary policy considerations to  2  BIS Review 12/2006  view these risks as an argument in favour of beginning to increase the repo rate now, rather than postponing the increases for a few months. However, this does not mean that we have set up any target for house prices. I intend to discuss the objective of monetary policy in more detail later. Let me first say a few words on future interest rate developments. Future interest rate developments The inflation forecast contains an assumption of how the interest rate will be adjusted in future. This is a relatively new method of making forecasts for the Riksbank. Like many other central banks, we have previously worked on the assumption of the interest rate remaining at the same level throughout the forecast period. The new method of forecasting also alters the communication and motivation of interest rate decisions somewhat.
Most analyses indicate that the policy rate has very little impact on housing prices and thus also on household indebtedness.17 Using the repo rate would be justified if what we were seeing was a credit boom throughout the Swedish economy. But this is not what we are seeing. Household indebtedness is increasing at approximately the same rate as disposable incomes. The rate of growth in bank lending to companies typically varies with the business cycle, and at present this rate is low (see Figure 11). All in all, credit growth is relatively low in the Swedish economy. Figure 11. Lending to households and companies from monetary financial institutions Annual percentage change 20  20  15  15  10  10  5  5  0  0  -5  -5  Total lending from monetary financial institutions Companies Households  -10 03  04  05  -10 06  07  08  09  10  11  12  13  Source: The Riksbank. Another problem with using monetary policy to influence household indebtedness is that this also has an impact on the exchange rate. All else being equal, higher interest rates lead to a stronger currency and, again all else being equal, a stronger currency leads to lower inflation and lower resource utilisation. There are thus clear costs associated with using monetary policy in this way. The alternative – and a better one – is to separate monetary policy from the policy that aims to promote financial stability.