Lars Nyberg: The Riksbank and the inflation target Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at Nordea, Copenhagen, 19 May 2005. *  *  *  Thank you for the invitation to come and speak at Nordea about Swedish monetary policy! Today I shall mainly concentrate on the content and interpretation of our inflation target. One special aspect of the inflation target and monetary policy that I shall discuss towards the end of my speech is the household sector’s growing debt burden and house price increases. A clear framework for monetary policy Sweden is currently enjoying what is usually described as an economic boom. Growth last year was almost 3.5 per cent, one of the highest figures in 30 years, and households’ real disposable incomes are expected to rise by around 3 per cent this year. Inflation is at its lowest point in living memory, as are interest rates. However, there is a problem. Employment has not risen at all as most forecasters, including the Riksbank, expected. We therefore find ourselves in a discussion of whether interest rates should possibly be even lower. Given the intensive debate on this subject, I consider there is good reason to describe and discuss our monetary policy framework and its significance for the way we work. It is well known that one of the Riksbank’s fundamental objectives since the beginning of 1993 has been to maintain price stability. This is inscribed in the Sveriges Riksbank Act of 1999 and is thus a parliamentary decision.
Investment has begun to rise, albeit at a slightly later stage than we had assumed. However, it is unlikely that the problem of a low investment rate now is connected to interest rates being too high. Given the low interest rates we see now and the good access to credit in the financial system, financing costs can hardly be regarded as a factor holding back investment. With regard to households, it is possible that even lower interest rates could make them increase their debt burden and borrow in order to increase consumption, but to me this is not an obvious conclusion. In addition, there are risks here. This brings me onto the question of how households have reacted to the low inflation and low interest rates, and this issue deserves more detailed discussion. Households’ growing debt burden and rising house prices In recent years, households’ debt burden has increased gradually and now amounts on average to 125 per cent of their annual disposable income, which is almost as high as immediately prior to the property crisis in 1992. However, interest payments are now less than half what they were then, approximately 4 per cent of disposable income. The fact that households are loaning at an increasing rate, both in Sweden and many other countries, can be regarded partly as an adjustment to lower inflation, which is also expected to be permanent.