Lars Heikensten: Economic recovery with low inflationary pressure Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at a meeting at Residenset Härnösand, 15 March 2004. *  *  *  Allow me to begin by thanking you for your invitation to today’s meeting. In order to get an idea of economic developments in different areas of Sweden and to explain how the Riksbank works, I pay regular visits to various parts of the country. The items on the agenda for today’s visit include a talk at Mid Sweden University on how the Riksbank works, a visit to SCA and a discussion with county representatives about developments in business and the labour market in Västernorrland. At this lunch, I intend to give my views on the economic situation and monetary policy. Before going into the economic assessment itself, however, I would like to say a few words about the Riksbank’s work methods. One of the Riksbank’s objectives is to maintain price stability. We have decided to define this as 2 per cent inflation as measured by the consumer price index, with a tolerance range of plus/minus 1 percentage point. Monetary policy is conducted on the basis of a forecast of inflation over primarily the coming two years. If the forecast in this perspective indicates that inflation will be lower than 2 per cent, the repo rate should normally be cut and vice versa.
However, satisfaction of this demand brings us back to the problem of the market dynamics of globalisation, which, as we all learnt from bitter experience, can have very negative effects. In a discussion about bond market development in the region, it would be useful for us to remind ourselves what this problem is. The pattern of the flow of international funds in Asia has, for some time now and encouraged by financial liberalisation, been characterised by a two-way traffic of investment flows. In the one direction, there is the very substantial outflow to the industrialised economies, predominantly in the form of bond investments but equity investment also featured, and characterised by a large element of public funds. In the other direction, there is the inflow of private sector foreign funds, of more, or less, substantial magnitude, depending on the macroeconomic circumstances, in the form, relatively speaking, of much more equity related investments. This recycling of funds brought benefits and risks. The greater presence of foreign funds, mostly in institutional form, and managed and serviced by highly versatile foreign financial intermediaries, in domestic financial markets in the region, no doubt, promoted financial sector development. Indeed, the overall efficiency, including the level of sophistication, of financial intermediation in the region has been substantially enhanced, contributing to economic growth and development. But, as we have observed, it also presents considerable difficulty to monetary authorities in the region in the maintenance of monetary and financial stability.