Untenable in the long run Although I cannot see any problems right now, I do not believe that nominal house prices can continue to increase by an average of well above 7 per cent a year as they have done since the start of the 2000s. This is not sustainable in the long term. And when we now consider when is the best time to begin raising the repo rate, my colleagues and I will be carefully examining variables such as house prices and lending. As I pointed out, for instance, in connection with the monetary policy meeting in February, I believe that during the interest rate increase phase ahead of us it might be appropriate to “lean against the wind” – to emphasise some concern by raising the repo rate slightly sooner than we might otherwise have done. But as I also said then, monetary policy is not the most effective means if one wishes to slow down, for instance, house price developments slightly. I then said I would like to see measures such as Finansinspektionen setting a limit for the loan-to-value ratio for new mortgages. Now they have presented a proposal for this and we will carefully monitor its effects. Leaning against the wind concerns, in my view, avoiding large fluctuations in inflation and the real economy – what provides the best-balanced monetary policy. It is thus about monetary policy, not financial stability.
It is no easy task to build this type of mechanism into our models, or even the part of the analysis based on assessments. Allow me to alter the time perspective somewhat and assume that a loan-driven bubble in the property market has burst and had serious consequences for the rest of the economy. There are some questions that I would like to be able to give the “right” answer to if I were standing in this situation looking back over the developments leading up to it, perhaps looking back a year. Would we then be able to claim with certainty that our interest rate policy did not contribute to developments becoming unbalanced and getting out of control? Would we be able to say with certainty that we did not suspect that these developments were untenable and that there would soon be a collapse? And would we be able to say with certainty that conducting a slightly stricter monetary policy than was justified by the forecasts had not helped? I consider it essential for the credibility of every central bank to be able to provide good answers to these questions. And for me it is natural to also take into account the type of factor I have now spoken about – that is so difficult to quantify – when I assess what is the best-balanced monetary policy. Other weapons than the interest rate are probably more effective with regard to preventing loan-financed house price bubbles from building up.