Inflation is measured as the CPIF and before 1987 as the CPI excluding interest rates. Sources: Statistics Sweden and the Riksbank. 13 [15]  Figure 5. Central banks have reacted relatively quickly and unison Policy rates  Increases so far this year 4  3  2  1  0 BoC  FED  BoE  RB  ECB  NB  Note. Per cent and percentage points. Sources: National central banks. Figure 6. In a good scenario, the Riksbank does not need to make very large interest rate hikes Real policy rate  Nominal policy rate  Note. Per cent. The real policy rate is the Riksbank’s expected real interest rate, calculated as a quarterly mean value of the Riksbank’s policy rate forecast one year ahead minus the inflation forecast (CPIF) for the corresponding period. As the real interest rate is a forward-looking variable, the outcomes are also based on forecasts. The outcomes are calculated on the basis of the most recently published forecasts at that point in time. Source: The Riksbank. 14 [15]  Figure 7. Favourable development during the inflation-targeting period Yield differential against Germany  Real wages  Note. Percentage points and index, 1970 = 100. The interest rate differential against Germany is for 10-year government bonds. Real wages are deflated with CPI and the dot refers to the outcome for Jan-Sep 2022. Sources: Macrobond, the National Mediation Office, the OECD, Statistics Sweden and the Riksbank. 15 [15]
How much central bank reserves the private banks had depended, among other things, on how much bank deposits they had on their books, related to the reserve requirements the Federal Reserve applied. The banks’ demand for reserves then determined how much bonds the Fed was obliged to purchase to steer the interest rates to the desired level. This led to the Fed already having a substantial portfolio of government bonds before the financial crisis. Since the level of interest rates in many countries has ended up close to the lower bound, most central banks around the world have made significantly greater purchases of financial assets with the aim of making monetary policy more expansionary. Longer market rates can be divided up into the sum of future expected short-term interest rates plus a premium. If the markets are not frictionless, the size of this premium may partly depend on the relative supply of a certain bond, which is to say the outstanding stock in the hands of the private sector. If the central bank purchases a significant proportion of the stock, the price of the remaining bonds can therefore rise and interest rates thereby fall. When the Riksbank purchases bonds, liquidity is injected into the market – the investor swaps the bond for deposits in a bank and the amount of central bank reserves in the banking system as a whole increases. How effective quantitative easing is depends on how investors and bankers use this liquidity.