Lars Nyberg: Monetary policy and house prices Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at the Swedish Investment Fund Association, Stockholm, 19 May 2010. *  *  *  I would guess that all of us here have at least two things in common. One is that our professional life in recent years has largely revolved around dealing with the effects of a global financial crisis. The other is that we would rather not do it again. Most of you represent the investment fund branch or unit trust investors in one way or another. And a reasonable guess is that recent years have been turbulent for many of you. It is fairly natural that the Riksbank should have been in the eye of the storm during the crisis. Our main tasks are to safeguard financial stability and to keep inflation low and stable, at the same time as contributing to stabilising production and employment. Managing the effects of the crisis and carrying out our statutory tasks in the best possible way has required a number of creative and unusual solutions. And it is not all over yet. The financial markets have recently been shaken up once again. Now the problem is mainly due to Greece, but to some extent also other EU countries such as Spain and Portugal, having serious problems with their government finances. The Swedish banks are not directly exposed to the countries in southern Europe to any great extent.
It is also obvious that the central bank must react to be able to carry out its tasks. So the way a central bank should react afterwards, once the bubble has burst, has not been debated as much as the question of how to act prior to this. Leaning against the wind – act sooner, not just later… This debate has previously been somewhat “polarised” between two stances – to “lean against the wind” or to “clean up afterwards”. The former stance involves the central bank raising its policy rate if property prices and lending increase at an alarming rate, even if an interest rate increase is not obviously justified on the basis of the forecasts for the real economy and inflation. One usually says that the central bank should “lean against the wind”. The basic idea is that keeping the policy rate higher than it would otherwise have been contributes to holding back the rise in property prices and ensuring that the fall in prices that comes sooner or later is much milder. A more balanced development in property prices also leads to more stable developments in the real economy and inflation. Although growth may be slightly lower in the upturn phase, there is on the other hand less risk that property prices will fall dramatically later on, which could contribute to a severe downturn. This is in some ways similar to an insurance policy: By accepting slightly weaker growth in the short term, one reduces the risk of much more negative developments further ahead.