SPEECH DATE:  28 January 2019  SPEAKER:  First Deputy Governor Kerstin af Jochnick  VENUE:  Swedish Property Federation  SVERIGES RIKSBANK SE-103 37 Stockholm (Brunkebergstorg 11) Tel +46 8 787 00 00 Fax +46 8 21 05 31 registratorn@riksbank.se www.riksbank.se  Cautious steps towards higher interest rates* Thank you for the invitation to come and talk about current monetary policy here at the Swedish Property Federation. In December, we increased the repo rate for the first time in over seven years. I can imagine many people asking themselves why we have started to increase the rate now and how we foresee monetary policy further ahead. And households, who are more indebted than ever before – can they cope with higher interest rates? These are questions that I will try to respond to today, based on our latest forecasts and assessments. As I see it, there is good reason to take cautious steps towards higher interest rates, in part because historically speaking, we find ourselves in a special environment. As you know, forecasts are always uncertain, and therefore I intend to conclude by discussing some of the factors that could lead to us deviating from our monetary policy plan. But let me start by outlining why we have decided to start raising the interest rate. Why is it appropriate to start raising the interest rate? To understand why we have now started to increase the interest rate, it may useful to go back in time a little.
To add some context to the option of bond purchases, it is important to note that the Swedish central government debt is small in relation to GDP, compared with, for example, the euro area and the United States. This sets a limit as to what is an appropriate amount of government bond purchases for monetary policy purposes. The Riksbank’s bond purchases for monetary policy purposes corresponds  10  This raises the issue of what the mandate of central banks should look like. In practice, there are a number of different market failures that monetary policy might try to correct. Incomplete information about the aggregate economy and the implications of this for price- and wage-setting, i.e. so-called price and wage rigidities, is a central part of the simplest conceptual framework of central banks. Prior to the global financial crisis of 2008–09, there was over-confidence in the ability of financial markets to correctly price risks. In the wake of the financial crisis, a discussion has emerged as to whether central banks should consider systemic risks that arise due to driving-forces that encourage excessive risk-taking and indebtedness. 11 See Bolton et al. (2020), Carney (2015) and Carney et al. (2019). 12 See Brunnermeier and Koby (2018). 7 [18]  to about 7 per cent of Swedish GDP, while the ECB’s and Fed’s programmes correspond to more than 20 per cent of GDP. The Riksbank, like the ECB, has the opportunity to broaden its asset purchases to include other types of bonds.