I believe there is a great likelihood that the low interest rate environment will be part of the monetary policy landscape for the foreseeable future and, given that it took almost 20 years to reach a decision on a new Sveriges Riksbank Act, the new proposal must be robust and able to cope with different conceivable developments going forward. One critical issue concerns the Riksbank's earnings. In this respect, there are two worrying trends. One is that demand for banknotes and coins is falling and the other is that the low level of interest rates is contributing to falling earnings for the Riksbank. If the real interest rate is around zero or even negative (as it has been for most of the last ten years), the proposed funding model will not work at all, as it is based on invested equity generating a positive real return. Consequently, a ‘backstop’ will be needed if this scenario is realised. In our response to the Inquiry, we propose an interest-free reserve requirement as an alternative form of funding for the Riksbank. 22 My assessment is that, in the future, we will presumably have to conduct monetary policy in a way that has great consequences for the balance sheet. The Inquiry's proposals certainly allow purchases of government bonds but, if the Riksbank needs a large balance sheet for monetary policy purposes, we will also have to consider the consequent loss risks and will therefore need a safety margin in our equity to secure satisfactory financial independence.
Urban Bäckström: Sweden’s economy is slowing down Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, to the Social Democrats, Härnösand, 20 August 2001. *  *  *  Thank you for the invitation to discuss economic developments in Sweden here in Härnösand. First let me say that conducting monetary policy in the past year has not been exactly easy. The repo rate was raised 0.25 percentage points last December, from 3.75 to 4.0 per cent, and this has been followed by an equally large increase to the present rate of 4.25 per cent. In June, moreover, the Riksbank intervened in the currency market in an endeavour to strengthen the Swedish krona and thereby avert a threat to the 2 per cent inflation target. This evening I shall be attempting to present the Riksbank’s actions as I see them in a wider perspective and convey my view of the challenges we will be facing. Before doing so, however, I want to underscore that a decision by the Riksbank to raise or lower the repo rate does not always appear completely self-evident. In order to avoid an unduly erratic monetary stance, these decisions have to be based on assessments of developments in the period one to two years ahead. The current consensus is that this is approximately the time it takes for an interest rate adjustment to exert its full effect and influence the economy in the desired direction.