The Central Bank has been implementing a monetary tightening to offset the secondary effects of supply shocks. Since domestic demand is growing at a moderate pace at the moment, it has been curbing the pass through from cost-push factors. As a matter of fact, the prices of products that do not use food or energy as main inputs have been rather well behaved compared to the prices of products that have food or energy as inputs. However, the fact that first round effects of the supply side shocks have reached unprecedented levels has been affecting inflation expectations adversely. Monetary policy cannot remain indifferent in case of a deterioration in the overall pricing behavior. If supply side shocks last long, their effects will spill over to the other sectors in the economy. A tighter stance is a must in order to control the expectations and to prevent the mutation of supply side shocks into demand shocks. If monetary policy does not react to the disruption in inflation dynamics, supply side price hikes may, after a certain point, easily evolve into a selffeeding vicious circle. Dear Guests, Why did the Central Bank not repeat the strong monetary tightening policy that it had implemented in 2006, but instead opted for a measured and gradual increase in interest rates in 2008? The current conditions differ from the May 2006 fluctuation.
Stefan Ingves: Introduction on monetary policy Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, to the Riksdag Committee on Finance, Stockholm, 10 November 2011. *  *  *  Clouds have gathered recently in the form of the financial unease and the debt crisis in Europe. As Sweden is a small, open economy we are affected in many ways by developments abroad. Nevertheless, we must of course do what we can to ensure stable economic development in Sweden. In the face of turbulence abroad we must make sure that we maintain order in the Swedish economy. The economic-policy framework in Sweden has worked well. We have learned from the mistakes we made in the past and are now in a much more favourable position than many other countries. This is something that we must build on, and monetary policy is trying to play its part in this. Today I will begin with an international tour before returning to Sweden. When the tour is complete, I hope that I will have shed some light on the following questions:   What is happening abroad and how is it affecting us?   How can we ourselves facilitate developments in Sweden – particularly with the help of monetary policy? What is happening abroad? Drama on the financial markets of the world There have been dramatic developments on the financial markets since the summer. Stock markets have plummeted (see Figure 1).