It’s not clear whether the overall effect is positive. While nominal conditions are more accommodating in euro area than in the US, real indicators point to a more restrictive stance. We may see a perverse feedback loop develop, with low inflation, increasing real rates, capital inflows and exchange rate appreciation mutually fuelling each other. The financial economy may be heading towards a bad equilibrium that would threaten the real economic recovery. The situation called for an appropriate policy response and, as you know, the Governing Council has agreed last Thursday on a strong package of four significant measures: First the refinancing and deposit rates have both been reduced – bringing the deposit rate into negative territory for the first time. This should encourage financial intermediaries to actively put their cash balances at work both on credit and asset markets. Those cash balances themselves will be significantly boosted as:  2  BIS central bankers’ speeches  Second, the ordinary regime of unlimited liquidity provision has been extended to the end of 2016. Third, the Eurosystem will conduct a new set of targeted longer-term refinancing operations. This exceptional liquidity will be provided at long maturity (up to four years) and a guaranteed fixed rate, a clear sign that monetary accommodation should persist for a very long time. Finally, the Eurosystem is actively preparing to buy asset based securities that will help channel monetary accommodation and ease financial conditions to private non-financial borrowers, especially SMEs. BIS central bankers’ speeches  3
Mr Bäckström elucidates the economic situation in Sweden and describes the consequences it may have for future monetary policy  Speech given by Mr Urban Bäckström, Governor of the Sveriges Riksbank at Föreningssparbanken, Ulricehamn on 1 September 1999. *  *  *  First a word of thanks for the invitation to visit Ulricehamn and talk about something that is close to the heart of a Riksbank governor, namely Sweden’s economic situation. I shall be describing the situation as I see it and saying something about the consequences it may have for future monetary policy. Unexpectedly strong trend The new statistics in recent months show that economic activity is stronger than most forecasters had foreseen as recently as in the spring. The growth of both domestic and external demand has been higher than expected. Relative to the first half of 1998, the GDP growth rate for the first six months of this year is an estimated 3.7%. Most observers are in the process of revising their forecasts upwards, if they have not already done so. In the Inflation Report last June the Riksbank judged that growth this year would reach 2.5%, followed by 3% next year as well as in 2001. When the Executive Board discussed monetary policy on 12 August, however, our assessment was that this year’s growth rate would be 3.5%. We also saw grounds for an upward revision of growth in the next two years, though the prospects for that period are more uncertain.