This is mainly because households’ interest expenditure will stop falling and then rise as the repo rate is raised. BIS Review 25/2010  9  Figure 9 Inflation measured as the CPI and the CPIF Annual percentage change  Source: Statistics Sweden  From crisis interest rate to monetary policy in an economic downturn The Executive Board of the Riksbank decided at the latest monetary policy meeting to hold the repo rate unchanged at 0.25 per cent to attain the inflation target of 2 per cent and to give sufficient support to the economic recovery. We are expecting to begin raising the repo rate again in the summer or in early autumn 2010 (Figure 10). This is slightly earlier than in our last forecast, which is because of the two components I mentioned. The financial markets have become increasingly stable and statistics on economic activity – such as slightly higher growth abroad, stronger employment and higher inflation – have gradually confirmed the picture of the recovery being on firmer ground. Figure 10 From crisis interest rate to monetary policy in a recession Per cent  Source: The Riksbank  10  BIS Review 25/2010  At the same time, we are now assuming that the increases in the repo rate can be made more gradually. This means that the forecast for the repo rate in the longer term is marginally lower than before, just under 4 per cent at the beginning of 2013. But, of course, forecasts so far ahead are very uncertain.
The TED spreads have gradually fallen and for some time have been at around the same levels as in summer 2007, before the financial crisis became acute. Although measures such as the central banks’ loans to the banks have probably played a role here, the low TED spreads indicate increased confidence and a more stable situation in the interbank market. 2  BIS Review 25/2010  Figure 2 More stable situation in the financial markets The difference between interbank rates and government bond rates (TED spread), basis points  Sources: Reuters EcoWin and the Riksbank  Another healthy sign is that individual problems have not spread exaggerated unease in the financial markets around the world. I refer here to Dubai World, for instance, which defaulted on its payments earlier in the winter and has since suffered new problems, and to Greece, which is struggling with very poor public finances. A further example is the economic problems in the Baltic countries. While these events are reminders in themselves that we still have some way to go before we can declare this crisis completely over, if the same things had happened in autumn 2008 the waves of turbulence would probably have been much higher and affected markets far from the eye of the storm. We are now on firmer ground – or on safer ice, if you prefer. A further positive sign is that activity in the financial markets has increased after being very low in some cases, particularly during the most intensive phase of the crisis.