The interest rate level does not affect the Riksbank’s balance sheet According to traditional textbook models, the central bank steers the short-term interest rate by buying and selling securities in order to expand or contract the money supply, known as “open market operations”. The basic premise is that commercial banks that receive deposits from households must keep a certain amount of liquid funds to be able to serve customers wishing to withdraw money from their accounts. These liquid funds constitute the monetary base of the economy and can consist of either banknotes in the banks’ cash vaults or reserves held by the banks in non-remunerated accounts at the central bank. When the market rate is positive, the banks lose money as they are obliged to maintain liquidity reserves, and the higher the interest rate is, the less willing the banks are to maintain reserves. According to this textbook model, there is therefore a directly negative correlation between the size of the monetary base and the level of the interest rate. The central bank can conduct monetary policy either by setting an interest rate and letting the monetary base adapt to it, or by determining the size of the monetary base and thereby let the interest rate adjust itself. Up until the outbreak of the financial crisis, the textbook model was quite an applicable description of monetary policy in the United States.
13 If it is considered important to influence market expectations in a certain way, I believe that it is normally easier to achieve this using well-considered communication, for example in the form of more or less forceful statements from the Executive Board about future interest rate policy, rather than in the form of bond purchases. … but increased likelihood of unconventional monetary policy in times of economic slowdown When the acute phases of the financial crisis began in the autumn of 2008, the Riksbank owned no domestic bonds. As a result, the Riksbank found it difficult to quickly intervene on the market with appropriate support measures. A lesson learnt from this episode was that the Riksbank needed to have preparedness in order to be able to act on the bond market in special situations. Such preparedness presupposes that the Riksbank maintains at least a small portfolio of government bonds in order to have the necessary systems, agreements and knowledge in place. The Riksbank therefore built up a government bond portfolio in 2012– 2013. 14 This justification for maintaining a bond portfolio is still relevant. A future reduction of the Riksbank’s bond holdings will therefore most likely not result in a complete phasing out of the portfolio. But the bond portfolio built up in 2012–2013 was small in relation to the one built up for monetary policy purposes. Bond purchases in 2012–2013 totalled SEK 10 billion, compared with purchases for monetary policy purposes since 2015 totalling more than SEK 300 billion.