The USD 700 billion worth of stimulus package, which was prepared in September 2008 to enable the government to assume bad debts of US financial institutions and which was considered the biggest state intervention in recent years, was pending at the US House of Representatives for a long time due to the harsh reaction from the public. In the meantime, there was a negative reaction from the public towards the excessively high salaries of banking sector managers, who frequently was urged a readjustment to the remunerations of managerial staff. Furthermore, new arrangements were brought onto the agenda for stricter supervision and to restrict the activities of the financial sector. In addition to these developments, views related to inefficient functioning of public institutions in charge of supervising the financial sector, primarily the Federal Reserve, in the pre-crisis period, raised intense criticism on these institutions, too. Meanwhile, under the name of financial protectionism there have been advocates of the discourse that international banks should halt their functions abroad and instead lend to the corporate sector experiencing difficulty in finding funds at home. On the heels of “Denial” and “Anger”, the global crisis entered the third and most disturbing stage in the final quarter of 2008 and the first quarter of 2009. We can define the common public feeling that prevailed in the whole world in this period as “panic” and “fear of collapse”.
If inflation undershoots the target at the same time as resource utilization is lower than normal, should it not be possible to keep the repo rate lower and thus have inflation closer to the target during the forecast period and more quickly return resource utilisation to a normal level? As I have described, I think there are fairly convincing reasons for the repo rate path described in the September Monetary Policy Update. The Swedish economy is strong and to attain the target a couple of years ahead we need only to start easing up on the accelerator. Because this is exactly what we are doing. The repo rate is being raised from an extremely low level and the repo rate path implies that we will have a negative real interest rate for a good time to come. This cannot be regarded as a contractionary policy – we are not slamming on the brakes. I have expressed some concern at recent meetings over what a lower repo rate path might entail. One view that I have put forward on several occasions is that monetary policy must manage risk. In this context it may be important not to treat the forecast period as separate and independent, but to try to take into account how decisions made now might affect developments beyond the forecast horizon. Of course it becomes more difficult to comment with any great certainty on what will happen the further ahead one tries to look.