Villy Bergström: Monetary policy and economic stability Speech by Mr Villy Bergström, Deputy Governor of Sveriges Riksbank, at a conference organised by the real-estate market magazine “Fastighetsvärlden”, Stockholm 12 May 2004. *  *  *  Thank you for the invitation to participate in Fastighetsdagen 2004 here at Grand Hotel. The property sector is an interest rate-sensitive component of the economy, and it is therefore interesting for me in my capacity as a member of the Riksbank’s Executive Board to come here and speak with you and discuss how the Riksbank views the current economic situation. The current economic situation In conjunction with the publication of the year’s first Inflation Report on 1 April the Riksbank cut its key interest rate, the repo rate, by a half percentage point. The reason was that the Executive Board judged that inflation would be below the target of 2 per cent inflation over the next two years. In the past year inflation has been low, averaging 1.3 per cent. This is attributable to a large extent to an adjustment of energy prices to more normal levels. But recently the drop in inflation has been sharper than expected and the Riksbank has gradually changed its view of inflationary pressures. Among other things this has been due to unexpectedly low import prices. The labour market has also been weaker than forecast and productivity has increased faster, resulting in lower domestic wage and price pressures.
It is this cost-benefit calculus that both motivates a role for macro-prudential policy, and helps us define precisely what we mean by it. In short, macro-prudential policy aims to improve the trade-off between the financial system’s contribution to the rewards expected in a growing economy and the degree of risk that we will face in the bad times. To return to my analogy, we might liken it to the NHS and to health insurance where we pay a bit in the good times to protect ourselves should our health take a turn for the worse. Principles of good policy making Macro-prudential authorities, like the UK’s FPC, work to ensure that financial systems are resilient to, and prepared for, the wide range of possible shocks they could face. Their aim is to ensure that when shocks occur, the financial system is able to absorb those shocks, rather than to amplify their impact on the economy. We ground what we do in two elements of good macro-prudential policymaking:  Macro-prudential policy should be targeted to provide a net benefit to the overall 3/7  BIS central bankers' speeches  economy. Where interventions incur costs, these should only be imposed when they are outweighed by the benefits over the full cycle. This is perhaps equivalent to starting a course of new medication, where a good doctor must be aware of potential side effects as well as intended benefits.