It is not necessarily a case of assuming that one has succeeded in capturing all possible sequences of events in a balanced manner and then choosing the repo-rate path that provides the smallest deviations from the inflation target and a long-term sustainable development of employment during the forecast period. 4  BIS central bankers’ speeches  As my colleague Stephen Poloz at the Bank of Canada recently pointed out, the shaping of monetary policy is more a question of risk management than a precise feat of engineering. 3 If one takes the uncertainty seriously, and I think we have to do that, my assessment is that one should put particular emphasis on the really serious negative scenarios that we have the capacity to influence with monetary policy. One such risk that we have tried to take into account is that in a situation where macroprudential policy measures cannot manage all of the risks linked to household indebtedness, a low repo rate over a long period of time could aggravate and increase the probability of a domestic crisis caused by household indebtedness. Another risk that requires particular consideration is that a low inflation rate over a long period of time could make inflation expectations lose their connection to the inflation target. When I entered a reservation against the monetary policy decision in July this year, all of us Executive Board members agreed that the repo rate needed to be cut for inflation to rise. The difference concerned how much it should be cut.
This is partly because of the conflict in Ukraine and the remaining questions regarding European banks’ balance sheets. The public finance situation is not entirely clear in all of the countries either. But once this uncertainty has calmed, developments in the euro area may also pick up, as we are expecting that monetary policy will remain very expansionary, fiscal policy will ease and credit granting will function better. The currently weak development in the euro area is of course also leaving its mark on the Swedish economy. The development of exports is weak, which is in turn holding back investment. Exports will not pick up again until economic activity abroad strengthens and it may take a year or so before export growth returns to a normal rate. But then investment is also likely to pick up as interest rates are low and the funding opportunities are good. Demand from our most important trading partners is currently fairly weak, therefore, and this has contributed to dampening growth in Sweden. On the other hand, demand from Swedish households has developed positively. In recent years, household incomes have increased at a good pace and consumption and housing investment have shown strong development. Since our previous forecast at the beginning of September, new revised GDP statistics for the second quarter showed a somewhat higher GDP and a somewhat stronger development in consumption and investment than we had reason to expect, given the preliminary statistics.