Understanding the Riksbank’s actions first requires understanding why we think the inflation target is so important. We introduced inflation targeting in Sweden in 1993 after we were forced to abandon the fixed exchange rate regime. We used academic research to support this decision, along with the good example provided by forerunners such as Canada and New Zealand.1 A well-implemented inflationary targeting policy benefits economic development by making inflation lower, more stable and more predictable. Sweden’s experiences in the decades before and after the introduction of the inflation target provide a rough idea of the significance of inflation targeting for the development of prices and wages – severe fluctuations in the 1970s and 1980s were followed by very stable development after the introduction of inflation targeting (see Figure 1). It has benefited economic development in Sweden. This is because more predictable price developments make borrowers and savers feel more secure in how inflation will develop and create good conditions for economic decisions. This lowers borrowing costs and thereby benefits investments. Investments and new recruitments are facilitated by companies’ ability to make a reasonably good prediction of price and wage cost increases over the lifetime of an investment. The less uncertainty there is over future price developments, the easier it also becomes to agree on conditions for various contracts, not least the wage agreements negotiated by the labour market parties.
MFIs’ lending to households for housing purposes and to non-financial companies, new loans and agreements, refers to monthly data. Repo rate refers to daily data and date of implementation. Sources: Statistics Sweden and the Riksbank  BIS central bankers’ speeches  9  Figure 3. Inflation expectations  Note. Per cent. Money market agents. Source: TNS Sifo Prospera  Figure 4. The development of the repo rate  Note. Per cent. Outcomes are daily rates and the forecasts refer to quarterly averages. Source: The Riksbank  10  BIS central bankers’ speeches  Figure 5. Bond purchases 240  240 200  200  65  160  200  160  135 120  45  45  50  50  120  80–90 80  80 40  40  40  30  30  30  30  10  10  10  10  10  February  March  April Policy meeting  July  October  10 0  40–50  0  Note. SEK billion. Government bond purchases will continue until the end of June 2016. Source: The Riksbank  Figure 6. Development of interest rates under a negative repo rate  Note. Per cent. Interest rate to households, lending rate refers to loans for housing purposes. Sources: Statistics Sweden and the Riksbank  BIS central bankers’ speeches  11  Figure 7.