As the banking sector is a very important part of the way monetary policy affects the economy, it is essential to closely follow developments in the credit market. Indirectly it also means that it is important that the Swedish banks attend to their problems in the Baltic both forcefully and quickly. This is to avoid the domestic transmission mechanism being disturbed by the international uncertainty. Here monetary policy and financial stability merge. The Swedish National Debt Office and Finansinspektionen (the Swedish financial supervisory authority) have also taken measures to alleviate the financial crisis. The Government has raised the state deposit guarantee and extended it to cover all types of deposits in accounts, it has introduced a guarantee programme, established a stability fund and decided on means of capital injections to the banks. Large fiscal policy stimulus packages Governments in many countries have presented substantial fiscal policy stimulus packages, which have been supported by the countries’ parliaments. Large packages have been presented in China, Japan and the United States, but there is substantial fiscal policy expansion even in a number of European countries. These include Sweden, where there is greater scope, in the form of strong public finances to begin with, than in most other countries. However, it is difficult to determine exactly what effects the fiscal policy measures will have on individual countries and on the global economy. In addition to the positive effects from the recently decided measures, growth is being stimulated by what is known as the automatic stabilisers.
If the effects of unchanged mortgage rates are excluded, inflation will develop in a more stable manner and be close to the target of 2 per cent for most of the forecast period. It is weak productivity developments and the weak krona that will contribute to holding up inflation despite the economic recession. If the Swedish economy risks deteriorating more than expected, it may be necessary to implement further unconventional measures The future direction for monetary policy will depend, as usual, on how new information on economic developments abroad and in Sweden will affect the prospects for economic activity and inflation in Sweden. If the economic situation deteriorates further it is possible to use monetary policy easing to further stimulate the economy. But there are also reasons for further consideration of what is an appropriate level for the repo rate. If the repo rate were to become too low the transmission mechanism might become less effective. This is because some market rates are lower than the repo rate. When the repo rate approaches zero, these interest rates would no longer be able to follow. A too low repo rate could also create costs in the financial sector as the result of, for instance, a reduction in the banks’ margins. There is thus a risk that the functioning of the financial markets will deteriorate if the repo rate is cut further. In this case monetary policy will not have the intended effect.