An unwarrantedly tight monetary policy According to the Riksbank’s booklet “Monetary policy in Sweden” (2010a), and the Sveriges Riksbank Act and its preparatory works, monetary policy shall aim to stabilise inflation around the inflation target and resource utilisation around a normal level. But in practice the Riksbank appears to have conducted a tighter monetary policy than is justified, given our task, over several quarters. The arguments put forward for conducting this policy are that growth is good, interest rates are very low and need to be normalised, that we need to signal to house-buyers that interest rates will increase, that the rise in house prices and household debts needs to be limited, and that financial imbalances could build up if we do not conduct such a policy. At the same time, our forecast for inflation (measured as the CPIF inflation rate) has been low in relation to the inflation target, and our forecast for unemployment has been high in relation to a reasonable interval for equilibrium unemployment. Moreover, research and practical experiences indicate that the interest rate increases that have been made and are planned will probably have only minor effects on house prices and household debts – and if anything, negligible effects on financial stability. Several problems with Swedish monetary policy In my opinion, there are now several problems with monetary policy in Sweden:   Monetary policy appears to have been aimed at trying to limit the increase in house prices and in household indebtedness.
There are several measures that have a greater effect on house prices and household borrowing than the policy rate, and at the same time entail lower costs for the real economy. In general, the problem needs to be analysed and specified, for instance, in the form of which market failures or which externalities or which consumer protection inadequacies it entails, to determine what measures can be used to deal with the problem closest to its source and at the lowest cost. The most suitable measure is probably one that is currently under the jurisdiction of another government agency, and not the Riksbank. To avoid the current problems with large differences between the repo rate path and market expectations, the decision-making process should start with forecasts for inflation and resource utilisation conditional on market expectations of interest rates in Sweden and abroad, that is, forecasts for the repo rate and policy rates abroad that are in line with market expectations according to implied forward rates in Sweden and abroad. The Riksbank used to make such forecasts earlier, before forecasts conditional on an own repo rate path were introduced, and the Bank of England and the ECB make such forecasts now. The methods for producing these forecasts may need improvement. The forecasts can then be used as a starting point for assessing whether a repo rate path that deviates from market expectations is necessary to best stabilise inflation and resource utilisation.