If this has boosted loan demand, the successful policy of inflation targeting has been partly responsible. But so far this is just a hypothesis. It is important, however, for households to feel certain about how large their future payments will be. An international comparison suggests that household demand for home loans depends on how the market is structured and particularly on the availability of instruments for households to manage their interest rate risk. Demand mounts in line with the opportunity to manage risk. In the United States and Denmark, households can fix the interest rates on their mortgages for long periods and also refinance these fixed-rate loans at a reasonable cost should interest rates fall. In Denmark, households’ debt ratio is more than 180 per cent, compared with 120 per cent for Swedish households. This is despite the fact that the country has roughly the same proportion of homeowners as Sweden. The supply of mortgages has increased, too. According to the new capital adequacy rules, Basel II, mortgages will be given a lower risk-weighting than today, which means that banks’ capital requirements will be lower if they hold a large proportion of mortgages. The adjustment to this has started already, thus toughening the competition and depressing lending rates. Households have also become an increasingly important borrower group for the major Swedish banks. Lending to households now comprises a little more than 40 per cent of the banks’ total lending.
Debt levels and developments in housing prices are taken into account in the Riksbank’s forecast of future inflation through their effects on household wealth and thereby on demand in the economy. It is difficult of course to predict how households will act, but we usually assume that they are rational and able to make sound judgements of how the economy will develop and how this will affect their borrowing costs. This is not necessarily a correct assumption. For example, it’s conceivable that households in certain situations would react stronger to a rate hike than to an equivalent rate cut. Should households not expect interest rates to rise in an economic upturn and a rate hike by the Riksbank came as something of a surprise, it could have effects on consumption beyond those predicted in our models. We discuss these effects and try to take account of them outside our models to the extent that we believe it is justified. Were households to react stronger than expected, it could mean that we don’t need to raise interest rates as quickly in an economic upswing as we otherwise would have done. BIS Review 67/2004  3  The question of the real economic effects beyond the forecast horizon is trickier. When a speculative bubble bursts, it can result in rapid price falls, but also in poorer economic growth and higher unemployment in the longer-term. Naturally, this is something we want to avoid if possible.