The National Bank incurs risks on its investments that cannot be hedged based on monetary policy concerns. Losses from gold and foreign currencies in particular can be significant. An adequate volume of reserves allows the National Bank to bear these risks, especially since such fluctuating values tend to correct themselves over the long term. Greater diversification of both the currencies and the investment instruments can bring about the necessary growth of monetary reserves. Diversification effects permit investments in higher-yielding and - from an individual perspective - riskier investments such as equities and corporate bonds without substantially increasing the overall risk. The return potential of monetary reserves depends on the liquidity and security requirements of the investments in terms of monetary policy considerations. Pursuing an efficient investment policy for the National Bank means achieving a return potential that is as high as possible within the existing restrictions. Under the new Act, the National Bank will pursue a broader diversification of its investments and, in particular, also invest in equities and corporate bonds. Because of the National Bank’s special position as a central bank, the exposure to equities and corporate bonds is subject to some specific considerations: first, a conflict of interest may arise  BIS Review 39/2004  1  between monetary policy and investment policy. For instance, interest rate hikes by the National Bank can have a negative impact on a company’s profits. Second, owing to its responsibilities in the area of system stability, the National Bank has insider information in the financial sector.
While GDP growth this year is forecast to be moderate, around 1.5 per cent, growth in both 2004 and 2005 is expected to be appreciably higher, approximately 2.5 per cent. So growth in coming years is anticipated to be somewhat higher than the potential growth we had forecast for Sweden in recent years. If Swedish economic activity is to rise as forecast, there will need to be a pick-up in investment. This began to fall as early as 2001 in manufacturing, and the following year it declined in the whole economy. Like many other forecasters we viewed the decline in investment as more transitory than it later proved to be. A year ago, our forecasts pointed to a turnaround at the beginning of 2003 (see Chart 3). In the June Inflation Report, it was forecast that investment would be delayed and begin to rise at the beginning of 2004. During the second quarter this year, gross capital formation fell by approximately 2 per cent according to the National Accounts. And in its latest forecast from August, the National Institute for Economic Research expects an increase in investment to be delayed further. The situation is clearly uncertain, even if the fundamental conditions for a rise in investment are good, with low interest rates, stable equity market growth and expectations of a recovery in the international economy. Another source of concern is connected with Swedish household consumption.