In the second place, the development of asset prices can lead to financial imbalances accumulating so as to threaten the stability of the financial sector and the Riksbank has a special responsibility here. Asset prices stimulate household consumption and business investment and it is probably here that asset prices are most significant for inflation target policy. Rising share prices, for instance, increase household wealth inter alia and are an indication that the economy is expected to grow strongly. Household consumption decisions are to a great extent based on expected incomes and wealth. At the same time, investment decisions by businesses are based on expectations of increased production. If households and businesses base their consumption and investment decisions on the expectations reflected in asset prices, demand will probably increase more rapidly than the actual growth of the economy. This creates an inflationary pressure in the domestic market. If the international investors also expect that productivity and the return will increase more quickly in Sweden than in the surrounding world, the exchange rate can, however, strengthen and also dampen inflation. Asset prices are also important for the assessment of stability in the financial system. It is important for instance to assess the risk for debt among businesses and households, which can be the result of rising asset prices, creating risks for suspensions of payments and ultimately for bank crises. What characterises a financial imbalance? Rising asset prices can thus contribute to financial imbalances being created in the economy.
It confirms that the expansionary monetary policy cannot be maintained for the next three years because price stability will be compromised in the long term. However, a swift correction in monetary policy would be precipitate since the inflation outlook is still associated with downside risks. If these risks materialised, we could again be faced with the threat of deflation. The uncertainties relate to the global economy and to the level of recovery within the financial industry. These factors have persuaded the SNB to opt for a cautious stance, and it is leaving its monetary policy course unchanged for the time being. Strengthening the SNB’s equity capital On 4 December, the SNB Bank Council decided to strengthen the SNB’s equity capital by doubling the allocation to provisions over the next five years. This decision was prompted by the growth in market and credit risks in the SNB’s balance sheet (creation of the SNB StabFund and the increase in currency reserves). Given the high level of the distribution  BIS Review 167/2009  3  reserve and results expected for 2009, this decision should not pose problems in terms of the distribution of profits, in the amount of CHF 2.5 billion annually, up to the end of the period agreed with the Confederation and the cantons (2017). My colleague Thomas Jordan will address these aspects in more detail in his own introductory remarks. 4  BIS Review 167/2009