Mr. Bäckström discusses the current situation for monetary policy in Sweden Remarks by the Governor of the Swedish Central Bank, Mr. Urban Bäckström, to the Standing Committee on Finance, in Stockholm, on 23/10/97. I should like to thank the Committee for the invitation to discuss the Swedish economy and the current situation for monetary policy. In my opening remarks today I shall begin by briefly summarising the recent years’ economic tendencies and then consider the present construction of monetary policy. A look into the future will conclude. What I have to say is based on the latest inflation report and events since it was published. From a dual situation to broader expansion Sweden’s economy is now entering the fifth year of expansion since the profound crisis at the beginning of the decade. Since GDP turned upwards in the summer of 1993, annual growth has averaged over 2.5 per cent. Annual inflation in this period has averaged only about 2 per cent. This is a marked contrast with the 1970s and 1980s, when annual growth averaged approximately 2 per cent and inflation about 8 per cent. In one respect, however, the situation to date is still dismal, namely as regards the labour market and employment. If an economy is growing well but employment remains weak and unemployment high, there is a strong probability that the labour market is affected by structural problems. Although growth in recent years has been satisfactory, the generation of a broader upswing in the economy has proved difficult.
Moreover, firms today appear to be adapting their costs to more strained financial conditions, which has resulted partly in less office space per employee. A bubble in the housing market? Developments in the housing market have been markedly different than those in the rest of the property market. Housing prices have risen by almost 60 per cent since 1992. During the same period the general price level has increased by around 20 per cent. The sharp rise in prices has continued despite the economic slowdown in recent years. This is a new experience that distinguishes the situation from previous business cycles. A significant driving force behind these price developments is the lower interest rate level. Lower interest rates mean that households and firms can finance more expensive properties, all other things being equal. The low-inflation economy that has been established in Sweden since the crisis at the beginning of the 1990s has therefore also brought with it higher debt ratios among households. Debt as a proportion of disposable income has risen on average from 90 per cent in the mid-1990s mitten to around 120 per cent at the end of last year.2 In spite of this, households’ interest ratio, i.e. the proportion of disposable income that is used to make interest payments, has fallen from 7 per cent to below 5 per cent. In comparison, the ratio during the crisis years was up to 11 per cent.