In my view, the experiences of including indebtedness in the balance when making monetary policy decisions in Sweden are therefore not particularly positive. Swedish monetary policy leaning against the wind The Riksbank has recently been much clearer about how the risks linked to housing prices and household indebtedness have affected the monetary policy decisions.2 The risks have  1  The minutes of the monetary policy meetings in 2005 and 2006 show that the Executive Board took into account the then very rapid increase in household indebtedness and housing prices (see, in particular, the minutes of the monetary policy meetings in April 2005 and February 2006). At the monetary policy meeting in December 2009 I myself mentioned developments in household debt and housing prices as a reason for not cutting the repo rate. 2  In the summary of the Monetary Policy Report published in October 2012, it is explained that the repo-rate path “is expected to go hand in hand with households’ debt ratios not rising”. The introduction to the Monetary  BIS central bankers’ speeches  1  been allowed to justify a higher repo rate than the prospects for inflation and resource utilisation would have indicated. Thus, one can say that the Riksbank has practised what is known in central bank contexts as leaning against the wind, to counteract a potentially harmful growth in debt.
When the krona appreciates, this has both a direct effect on inflation, which is pushed down when import prices fall, and an indirect effect in that the demand for Swedish-produced goods and services is affected negatively. Strong krona contributes to low inflation The possibility for monetary policy to steer the exchange rate is limited, but there is nevertheless reason to believe that the krona has become stronger than it would otherwise have been because of our leaning against the wind. If foreign exchange market participants see an increased difference between the yield on a Swedish treasury bill and the yield on foreign equivalents, the Swedish treasury bills and thus the Swedish krona will be more attractive and therefore more expensive – that is, the krona will appreciate. Although it is difficult to see clear links between observed exchange rates and interest rate differentials, a positive interest rate differential usually coincides with a strong krona (see Figure 1). The difficulty in seeing clear links is due to expectations having considerable significance for trade on the financial markets. The market rates and the krona rate do not change when the Riksbank makes its repo-rate decisions, they change when market participants’ expectations of future repo-rate decisions change. Figure 1.