Negative repo rate and bond purchases – to safeguard the credibility of the inflation target The fact that we now have introduced a negative interest rate and begun purchasing government bonds in Sweden is basically because we want to safeguard the role of the inflation target as nominal anchor. I mentioned earlier that monetary policy should give consideration to financial stability. But this is because financial stability is a necessary condition for attaining stable inflation in the long run. Conditions for being able to give  23  For further information, see “Low global interest rates”, article in the Monetary Policy Report, October 2014, Sveriges Riksbank. See also Hamilton, D., Harris, E. S., Hatzius, J. and West, K.D., “The Equilibrium Real Funds Rate: Past, Present, and Future”, University of California at San Diego Working Paper, 2015. BIS central bankers’ speeches  9  consideration to financial stability in monetary policy decisions are that inflation expectations are firmly anchored around the target and that inflation is fairly close to the target. With hindsight, we can see that inflation has been lower than the Riksbank and most other forecasters had expected. And this doesn’t only apply to Sweden; inflation is very low in most developed countries. What happened in Sweden last year, when inflation continued to be lower than expected at the same time as inflation expectations continued to fall, has thus rather dramatically changed the conditions for monetary policy.
25 The supply of credit increases, at the same time as interest rates are  24  For an overview of how complementary monetary policy functions, see De Graeve, F. and Lindé, J., “Effects of unconventional monetary policy: theory and evidence”, Economic Review 2015:1, Sveriges Riksbank or the article “The Riksbank’s complementary monetary policy measures”, Monetary Policy Report, February 2015, Sveriges Riksbank. 25  Some studies of the effects of complementary monetary policy in other countries include, for instance, Weale, M. and Wieladek, T. “What are the macroeconomic effects of asset Purchases”, External MPC Unit Discussion Paper No. 42, 2014, Bank of England, Gertler, M. and Karadi, P. “QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool”, International Journal of Central Banking,  10  BIS central bankers’ speeches  pushed down and the exchange rate weakens – aggregate demand in the economy increases. When the economy is stimulated, inflation gradually rises, as companies can charge higher prices and the lower unemployment pushes up wages. A weaker exchange rate also leads directly to higher inflation, as prices of imported consumer goods rise faster. Let me give an example of how the increase in the Riksbank’s balance sheet in the form of government bond purchases can spread throughout the economy. When we buy government bonds, those who sell them receive liquid funds in the form of their bank account balance instead of the bonds they previously held.