9 Fiscal policy also became much more norm-based than before. There was a need to tighten regulatory frameworks with regard to decisions on state income and expenditure. Several important steps were taken, where the surplus target – the target of a 1 per cent surplus in public finances over a business cycle – is the most well-known. The increased element of “norm-based thinking” in monetary policy has also had clear consequences for the way it is conducted in practice – moving away from detailed regulations and credit allocation to a more “minimalistic” system, where the Riksbank steers the repo rate to attain the inflation target. Long period of economic stability following introduction of inflation target – but loss of focus on financial stability In many respects, the Swedish economy has developed better from the 1990s and onwards. Productivity growth increased substantially during the second half of the 1990s. Possible reasons for this include structural reforms, such as deregulation on several markets and increased use of IT. This development continued until the mid-2000s and the Riksbank was one of several analysts who were surprised by the strength – and resilience – of the growth in productivity. The result was strong GDP growth with low inflationary pressures. The reformed framework for public finances led to a declining trend in the national debt as percentage of GDP. From being regarded as a heavy burden 20 years ago, public finances rapidly developed into one of the Swedish economy’s major strengths.
Negative repo rate and bond purchases – to safeguard the credibility of the inflation target The fact that we now have introduced a negative interest rate and begun purchasing government bonds in Sweden is basically because we want to safeguard the role of the inflation target as nominal anchor. I mentioned earlier that monetary policy should give consideration to financial stability. But this is because financial stability is a necessary condition for attaining stable inflation in the long run. Conditions for being able to give  23  For further information, see “Low global interest rates”, article in the Monetary Policy Report, October 2014, Sveriges Riksbank. See also Hamilton, D., Harris, E. S., Hatzius, J. and West, K.D., “The Equilibrium Real Funds Rate: Past, Present, and Future”, University of California at San Diego Working Paper, 2015. BIS central bankers’ speeches  9  consideration to financial stability in monetary policy decisions are that inflation expectations are firmly anchored around the target and that inflation is fairly close to the target. With hindsight, we can see that inflation has been lower than the Riksbank and most other forecasters had expected. And this doesn’t only apply to Sweden; inflation is very low in most developed countries. What happened in Sweden last year, when inflation continued to be lower than expected at the same time as inflation expectations continued to fall, has thus rather dramatically changed the conditions for monetary policy.