Stabilising inflation stems from the objective of price stability in the Sveriges Riksbank Act. Stabilising resource utilisation stems from the emphasis in the preparatory works for the Sveriges Riksbank Act, that the Riksbank, without prejudice to the price stability target, should support the goals of general economic policy with a view to maintaining sustainable growth and a high rate of employment. House prices and household debt The arguments for raising the repo rate more than is justified by inflation and resource utilisation have emphasised developments in house prices and household indebtedness. There have also been references to potential financial imbalances building up. However, these arguments do not show what effect the repo rate is expected to have on house prices and indebtedness, or which financial imbalances are referred to. Nor is it clear what effects and risks might be involved, or how we can evaluate the effects and risks in relation to the cost of inflation and resource utilisation being too low. As household debt mostly consists of mortgages and these are used to buy housing, house prices and household debt are really two sides of the same coin. If house prices increase, then household debt increases. If we want household debt to increase more slowly, then house prices must increase more slowly. Thus, slowing down the increase in house prices and the increase in household debt is essentially the same thing. Regardless of whether or not these factors are a problem, the repo rate would appear an unsuitable instrument for influencing house prices and debts.
Widespread theoretical and empirical research shows that changes in policy rates have little effect on house prices, but a substantial effect on production, jobs and unemployment. A typical conclusion is that, all else being equal, an increase in the policy rate of 1 percentage point reduces house prices by around 1.5 per cent, but at the same time reduces GDP by around one third, that is, about 0.5 per cent. So to reduce house prices by 15 per cent may require raising the repo rate by as much as 10 percentage points. But this would cause GDP  BIS Review 158/2010  3  to fall by around 5 per cent. These estimates are of course uncertain, but nevertheless imply very high real costs in terms of GDP. 2 If house prices and household indebtedness would be regarded as a problem, there are more effective instruments than the policy rate, which also have less negative effects. Some examples are the mortgage ceiling introduced by Finansinspektionen (the Swedish Financial Supervisory Authority), a mortgage tax or limited tax deductions for mortgages, a property tax, a reserve requirement for mortgages, and so on. As a comparison, a higher repo rate functions not only as a tax on mortgages, but also a tax on loans for production, investment and trade. This in turn leads to the large costs to the real economy I mentioned earlier. Are house prices and household indebtedness a problem?