Today I intend to give my views on these issues. I shall concentrate on the role played by elevated asset prices and indebtedness with regard to developments in demand and thereby price stability. Let me begin with a brief summary of my speech: •  Many central banks are worried by rapidly growing house prices and lending over long periods of time. The historically very low interest rate levels could create unrealistically low expectations of interest rates in the future. However, it is difficult to determine whether this development actually increases the risks to demand and inflation and whether – and how – monetary policy can in this case take these factors into account. •  These risks cannot be captured by the traditional models and forecasting methods normally used by central banks, which means that opinions differ as to how the central banks should act. Should we react in advance to subdue possible negative effects, or should we wait until a possible correction takes place? •  My opinion is that we must make the best possible assessments and act in advance to try to prevent the risk of large corrections leading to significant falls in demand and to lower inflation further ahead. •  There are both cyclical and structural factors which could motivate high growth figures for loans and house prices in Sweden over a period of time.
The stock market upturn was probably pushed up initially by fundamentally motivated expectations of future profits and growth in the IT and telecom sector, but also by the fact that technology was generally considered to create the conditions for higher growth over a long period of time. However, there soon appears to have arisen a general over-optimism regarding the durability and strength of the expected future increases in income. Low interest rates as a result of low inflationary pressures contributed at the same time to an increase in companies’ and households’ indebtedness in many countries. Investment growth was high in many sectors. When the share bubble burst, it was followed by an economic downswing, where high indebtedness created a requirement for consolidation in the corporate sector. This led to demand for goods and services being subdued, together with an increase in precautionary saving in many households. To avoid a deep economic recession and a further decline in inflation, the central banks cut their policy rates from the already low levels. However, growth in investment and employment was a long time coming, as instead of new recruitment and expansion, companies chose to rationalise their production and achieve scope to reduce their debt ratios through lower costs and to meet the increased competition from low-cost countries. The low interest rates thus did not seem to have any immediate effect on consumption and investment, but gave further stimulation to household sector demand for housing and loans in many countries.