Although the upward pressure on commodity prices has taken a time-out with the slowdown in world growth, in a year or two it may very well be a problem that central banks will once again need to manage. At the same time, it is worth pointing out that this need not necessarily be a big problem. As I have observed, we now know a lot more about how monetary policy should be conducted than we did when I first arrived at the Riksbank in 1976 – in between the two oil crises. The problem of rising commodity prices can be managed within the prevailing framework for monetary policy. Essentially, it is a question of preventing what happened during the 1970s, namely that the inflationary impulses that the oil price shocks entailed were allowed to become entrenched and to spread to wages and other prices. But it is also important that the policy is not so tight that there are overly negative effects on production and employment. Of course, this is not an easy balancing act. But I can assure you that such deliberations lie behind every individual interest rate decision taken by the Executive Board. …the debate on monetary policy and house prices,... Another question that has arisen during my time as member of the Executive Board, and which is also fairly controversial, is how monetary policy should react when house prices and household indebtedness increase rapidly, which was the case in Sweden and many other countries until quite recently.
The inflation target for monetary policy, the fact that the Riksbank now has statutory independence and the fact that we now have sound public finances, a budget ceiling and balance targets for fiscal policy – all of this has contributed to much greater stability in the economy than we had in the 1970s and 1980s. The current regulations mean that economic policy as a whole can never seriously clash with the monetary policy target in the way it actually sometimes did during the period with a fixed exchange rate regime. Both public authorities and banks also learned a lot about financial stability during the crisis in the 1990s. The Riksbank now has an organisation that continuously analyses the stability of the financial system and maintains a preparedness to act in a potential crisis situation. This gives us the opportunity to detect and counteract at any early stage any changes and vulnerabilities that could lead to a serious crisis. It also makes it easier to manage the problems if a crisis were to occur. The experiences of both the Riksbank and others have definitely given us better resilience to the current global financial crisis than we would otherwise have had. There are several reasons why we now have greater credibility and better conditions to do our job efficiently. One is most probably that openness and clarity have long been, and still are, of central importance.