When the fixed exchange rate target was abandoned in November 1992, after an unsuccessful attempt to defend the krona – you probably all remember the increase in the marginal rate to 500 per cent – it followed on from yet another cost crisis. At the beginning of 1993, the outlook for the Swedish economy was bleak - we were in the midst of an international economic slowdown, the banking crisis was a fact, interest rates were high and unemployment was soaring. During the period with a fixed exchange rate fiscal policy had borne the entire responsibility for stabilisation policy, while monetary policy had been tied to defending the krona rate. It was evident that fiscal policy had not been sufficiently tightened in connection with the overheating to which credit deregulation contributed. It was high time to break with history – but how should this be done? A new stabilisation policy regime A comprehensive change in regime was implemented in order to take Sweden out of the crisis and to create the conditions for a more stable and more favourable economic development. Central government finances were consolidated and fiscal policy was subjected to regulations regarding an expenditure ceiling and surplus target to attain a long-term balance in public finances. Monetary policy was aimed at safeguarding price stability. The interest rate, which had been a tool for balancing currency flows during the period with an exchange rate target, would now be used to affect demand in the economy with the aim of stabilising price trends.
A possible international slowdown in the coming two years could lead to growth failing to reach the level indicated in the main scenario of the Riksbank’s Inflation Report. Another question that affects the Riksbank’s monetary policy considerations is developments in the property market. Exaggerated increases in asset prices can lead to subsidence in the future. With a larger percentage of debt in relation to income and with shorter periods for fixing interest rates on loans, it is probable that monetary policy would have a stronger and faster impact on household consumption. Moreover, the Riksbank’s tasks include not only safeguarding price stability, but also financial stability. This is a further reason for closely following developments in indebtedness in the economy and price trends in the property market. In the event of economic shocks it might be necessary to weigh price stability, real economic stability and financial stability against one another; it might not be possible to achieve all of the objectives at the same time. 5/7  Future challenges for monetary policy Some factors that have monetary policy significance do not change according to the Swedish business cycle. This includes the effects of globalisation. As I mentioned earlier, globalisation and increased competition from low-cost countries like China and India have contributed to lower inflation by way of import prices, increased competition and greater pressure for structural change. This makes demands not only of monetary policy, but also structural and fiscal policy.