With a zero interest rate, households, firms and authorities become indifferent about the choice of whether to hold securities such as treasury bills and bonds or to hold cash. 2 A so-called open market operation in which the central bank increases the monetary base and thus liquidity by buying treasury bills and bonds and paying with cash, then becomes ineffective in the sense that the interest rate is still zero and the only thing that happens is that households, firms and authorities hold more cash and fewer Treasury bills and bonds. A situation with a zero interest rate is therefore also called a liquidity trap. The issue of monetary policy when the interest rate is zero has become topical again. Since the autumn of last year, the outlook for the global economy has deteriorated further. At the same time as forecasts for inflation and growth have been revised downwards, policy rates  1  For more information on these measures, see www.riksbank.se. 2  This applies when the amount of cash held does not fall below the level needed for transaction purposes. BIS Review 19/2009  1  have been lowered and are now approaching zero in several countries. In December last year, the Federal Reserve, for example, cut its policy rate to an interval between 0–0.25 per cent, while in Japan the policy rate is 0.1 per cent and in Switzerland 0.5 per cent. Inflation throughout the world is also falling rapidly.
The second issue is how independence should a Central Bank be? I believe that a Central Bank should be independent within the government because it is the Minister of Finance who has to be accountable to the parliament on issues relating to macro economic, fiscal, monetary and financial system matters. I agree absolutely with Governor Paul Acquah that monetary and fiscal policies must be harmonized in order to achieve macro stability, meaning that a Minister of Finance and a Governor of a Central Bank must work hand in hand to achieve a proper policy mix of fiscal and monetary policies so that sustainable growth can be achieved. BIS Review 53/2002  3  Ladies and gentlemen, I feel that I have taken enough of your time already. Therefore, I would like to conclude that a Central Bank can be considered as having its independence when it can perform its duty of achieving and maintaining price stability without any political or governmental interference, and with honesty and integrity while working hand in hand with the Ministry of Finance to achieve a balanced fiscal and monetary policies mix that lead to macro stability and sustainable growth. Inflation targeting approach is an effective mean to achieve Central Bank independence because it encompasses 4 very important ingredients: operational independence, responsibility, transparency and accountability. Other means can be just as effective if they have these 4 required ingredients.