When homeowners get a new mortgage with a better interest rate, and pay off their 4/7  BIS central bankers' speeches  old higher rate one in the process, existing agency MBS are paid off more quickly, and replaced with greater issuance of newly-minted agency MBS containing the new, lower-rate loans. The benefit of the FOMC’s redemption cap is that it limits the pace at which securities will flow back into private hands under scenarios in which interest rates fall much more than expected. To illustrate this, projections for agency MBS repayments under a scenario of lower interest rates are shown in Panel 3—as you can see, in this low rate scenario, the caps would still be exceeded even when fully phased in. By providing market participants some certainty that the pace of balance sheet decline will be gradual across economic scenarios, this plan should help mitigate the risk of unexpectedly sharp shifts in asset prices, liquidity, or market functioning should markets begin to put greater weight on lower interest rate scenarios. Indeed, by promoting greater confidence in the stability and liquidity of the Treasury and agency MBS markets across economic outcomes, the FOMC’s plan should result in lower risk and liquidity premia on these assets, relative to normalization plans that do not promote such confidence. Being prepared for the unexpected While I am confident that the FOMC’s plan will work well, there’s always the risk that events unfold differently than expected.
In addition, we still believe in an appreciation of the krona during the forecast period due to fundamentals, which have subduing effect on imported inflation. It is therefore estimated that payroll expense could increase by an average of just over 4 per cent a year during the forecast period without any threat to the inflation target. However, 4 per cent is too high in the slightly longer term. There is a great risk that this figure will become established as a norm, as payroll expenses have increased by approximately 4 per cent a year over the past five years. If Sweden were to participate in Stage Three of EMU, we cannot have a rate of wage increase that deviates from the average in the euro countries. If the "norm" for payroll expense increases is 3.5 per cent, this means that nominal wage agreements must be signed at lower levels. This is because the scope must also cover wage drift and other wage costs, such as collective fees and reductions in working hours. Conclusion  In the October Inflation Report we foresaw a slightly more prolonged economic recovery than had earlier been expected. The weak development in the financial markets in the wake of bankruptcies and accounting scandals had contributed to the start of a decline in confidence from companies and households. In Sweden demand had been upheld relatively well, but it was estimated that fiscal policy needed to be tightened up to manage the expenditure ceiling. This means that growth may be more subdued in future.