Monetary policy has limited short-run effects on household indebtedness and – with low and stable inflation – no long-run effects As I said earlier, a possible explanation for the tight monetary policy is that in practice the aim has been to limit household indebtedness, that is, the household debt ratio. As far as I can see, there is a misunderstanding here about what monetary policy can achieve with regard to household indebtedness. As I pointed out in a speech in November last year (Svensson 2012c) and at the monetary policy meeting in December (Sveriges Riksbank 2012d), according to established theoretical and empirical research, including the Riksbank’s own studies and calculations, for example Riksbank (2011), monetary policy has very little short-run impact on household indebtedness and, with low and stable inflation, no long-run impact. Household debt has risen to approximately 170 per cent of disposable income. The debt is mainly mortgages, so in order to understand the development of debt and whether it is a problem, we must understand developments in housing prices and the value of housing. Households’ real assets (owner-occupied homes, second homes and condominiums), have grown in pace with their debt and there is a stable relationship between them. The loan-tovalue ratio, the ratio of debt to real assets, has been relatively stable and has remained in the interval of 50–60 per cent since the mid-1990s (Figure 4). There has been considerable research into how housing prices are determined.
Interest rates are at an all-time low and the proposals in the Government’s Budget Bill imply a looser fiscal stance. Household consumption will continue to grow steadily in the period ahead, and business investment also appears to be picking up again following a number of years’ weakness. Taken together, this means that GDP growth in 2004 is forecast to be around 3.7 per cent, after which it will be dampened somewhat, standing at about 3 per cent in 2005 and 2006, which is a fairly high level in historical terms. Despite the firm growth Swedish inflation is very low – in January it stood at 0.4 per cent, measured as the annual change in UND1X. The weak inflation is primarily due to surprisingly low import prices. Other causes are the strong productivity growth; the krona’s appreciation in the past half year, above all against the dollar but also against the euro; and low electricity prices. There are many indications that we won't be seeing any significant inflationary pressures in the coming year either. That made it natural for us to decide not to raise interest rates at the end of January. My personal view is that it will probably be a while before a rate hike comes into question. The risk outlook Surrounding this rather bright picture are a large number of risks that our growth and inflation forecasts will not be met in the coming two years. The key risk factor is how the US deficits will be corrected.