Cyclically-adjusted net lending Percentage of potential GDP 0  0  -1  -1  -2  -2  -3  -3  -4  -4  -5  -5 2010 2011  -6  -6 Euro area  Germany  Advanced economies  Source: The IMF  The links that exist between the levels of debt, interest rates and growth also suggest that a high level of public debt entails risks. For example, a high level of debt tends to lead to higher long-term interest rates, as shown in Figure 3.3 A high level of debt may also lead to lower growth due to increased vulnerability to future crises, or because taxes may have to be increased to finance the debt.4 The higher the level of debt, the more the country must set aside to make the interest payments on its debts. These are a couple of the reasons why  2  The term cyclically-adjusted deficits here refers to public net lending adjusted for cyclical effects. The group advanced economies includes the United States, the euro area, Japan, the United Kingdom, Canada, South Korea, Australia, Taiwan, Sweden, Switzerland, Hong Kong, Singapore, the Czech Republic, Norway, Israel, Denmark, New Zealand and Iceland. 3  See also Baldacci, Emanuele and Kumar, Manmohan S. (2010), Fiscal Deficits, Public Debt and Sovereign Bond Yields. Working Paper no. 10/184. IMF. 4  For more details see Fiscal Monitor Update, November 2010. IMF or Kumar, Manmohan S. and Woo, Jaejoon (2010), Public Debt and Growth. Working Paper no. 10/174. IMF.
Figure 7 shows that the real repo rate is expected to be negative in 2012–2013; that is for a substantial part of the forecast period. If this proves to be the case, won’t there then be a risk of monetary policy being too expansionary? Won’t we perhaps risk overheating, a too high rate of inflation or an unsustainable development of household debt? This is of course not impossible, but at present I do not think that it is very likely. To explain how I have reached this conclusion I would now like to briefly summarise how I view some of the risks associated with a very low real interest rate. 8  BIS central bankers’ speeches  Figure 7. Low real repo rate for some time to come Real repo rate, per cent, quarterly mean values 3  3 December February  2  2  1  1  0  0  -1  -1  -2  -2 06  08  10  12  14  Note. The real repo rate is calculated as a mean value of the Riksbank’s repo rate forecast for the year ahead minus the inflation forecast (CPIF) for the corresponding period. Source: The Riksbank  Overheating – not a risk at present The first risk thus relates to resource utilisation in the economy and the risk of overheating. As I have already said, weak economic development abroad is having a significant impact on the Swedish economy.