An unwarrantedly tight monetary policy According to the Riksbank’s booklet “Monetary policy in Sweden” (2010a), and the Sveriges Riksbank Act and its preparatory works, monetary policy shall aim to stabilise inflation around the inflation target and resource utilisation around a normal level. But in practice the Riksbank appears to have conducted a tighter monetary policy than is justified, given our task, over several quarters. The arguments put forward for conducting this policy are that growth is good, interest rates are very low and need to be normalised, that we need to signal to house-buyers that interest rates will increase, that the rise in house prices and household debts needs to be limited, and that financial imbalances could build up if we do not conduct such a policy. At the same time, our forecast for inflation (measured as the CPIF inflation rate) has been low in relation to the inflation target, and our forecast for unemployment has been high in relation to a reasonable interval for equilibrium unemployment. Moreover, research and practical experiences indicate that the interest rate increases that have been made and are planned will probably have only minor effects on house prices and household debts – and if anything, negligible effects on financial stability. Several problems with Swedish monetary policy In my opinion, there are now several problems with monetary policy in Sweden:   Monetary policy appears to have been aimed at trying to limit the increase in house prices and in household indebtedness.
It reached the target and was curtailed by the end of last year. Thereby, we backed up the capability of the banking system to lend to the economy, but avoided risk accumulation triggered by excessive regulatory easing. We have managed to preserve households’ confidence in financial institutions: instead of a bank run we saw ruble deposits growing by 25%. What are our current objectives? It is the interest rate policy that will allow us to achieve the 4% inflation target by the end of 2017. Our inflation targeting principle is that the Bank of Russia does not curb inflation at all costs, but considers the economic environment and financial stability issues when taking decisions. I insist that the policy of dragging inflation down to 4% is in line with the general economic policy designed to create conditions for the economic growth. Lending will see a transition from structural liquidity deficit to structural liquidity surplus, and this is a very important development. So far, the Bank of Russia issued loans to banks which reached up to 4 trillion rubles last year. Now, as the budget spends the reserve funds, the Bank of Russia will absorb this liquidity (through deposit operations, among other things) to keep the interest rates manageable, and we are already preparing a trial issue of Bank of Russia bonds. This tuning of monetary policy instruments will ensure manageability of interest rates in the money market, in lending and in the economy as a whole. On the development of the banking sector.