The central function of the Riksbank is to achieve price stability or at least keep the rate of price increases low and stable. This approach to monetary policy is based on the insight that in the longer run, higher price increases cannot generate growth and employment. Growth stems from other factors, such as technological advances, the way the economy functions, demographic trends, etc. Attempts to stimulate economic growth by accepting higher inflation soon tend to boomerang. This is clear both from our own experience in recent decades and from what has happened in other countries. The players in the economy adapt to the higher inflation; prices, wages and interest rates rise; the end result is normally an economic trend that is weaker instead of stronger. Throughout the western world today, economic policy is less concerned with “stop and go” policies to influence short-run activity and focuses more on creating good and stable long-term conditions for economic growth and employment. In such an approach, the function of monetary policy is to safeguard the value of money. In the past decade support for a policy of this type has also grown markedly in Sweden. This year’s Spring Economic Bill states that “The overriding task for monetary policy is price stability”. In keeping with this and in order to facilitate the implementation of a credible monetary policy, more and more countries are striving to separate monetary policy decisions from day-to-day policy-making.
Under certain circumstances stock adjustments may trigger a more marked economic slowdown. This may happen, for instance, if effects of the adjustments either spread to private consumption or have a negative impact on the labour market and household confidence. The Riksbank was therefore alert to the risk of private consumption being weaker last spring and summer, which would have pointed to a further curb on inflation. In practice, however, private consumption went on rising in the summer and its growth became somewhat stronger in the autumn. Low inflation and interest rate reductions The rate of inflation decreased during 1996 and the rates that different economic agents expected in the future also moved down markedly (Diagram 2). This enabled the Riksbank to lower the repo rate from 8.91 to 4.10 per cent. As a result, the initial position for the ongoing growth phase in Sweden’s economy is more favourable than for many years. The drop in the rate of consumer price increases was appreciably accentuated by the Riksbank’s repo rate cuts in that these contributed to the reduction of mortgage interest costs. Under normal circumstances the tolerance interval around the price stability target should suffice BIS Review 56/1997  -4-  to absorb transitory effects on the price level. Last year, however, the fall in interest rates was very marked because many factors had a concerted effect that rapidly altered the picture of inflation. The magnitude of that interest rate fall is also largely responsible for the weak price trend to date in 1997.