The second is that expectations that monetary policy will remain expansionary in large economies like the Unites States and the euro area, for a longer period than was previously assumed, also have an effect on Swedish monetary policy. Swedish interest rates cannot deviate too much from foreign interest rates without this having an effect on the exchange rate. The exchange rate is of great importance to both inflation and resource utilisation and thus influences what constitutes a well-balanced monetary policy. What then will be the overall effect for Sweden? We were able to note in September that the demand for Swedish exports was growing more slowly than previously expected due to the weaker development of the export markets of importance to Sweden. This weaker development is partly due to the fact that market turbulence resulting from the uncertainty about weak public finances in Europe and the United States is forcing some countries to launch extensive austerity programmes. 8  Bergman, 2010. 9  Central banks can conduct quantitative easing, which entails buying assets with the aim of reducing long interest rates. They can also carry out a twist, as recently announced by the Federal Reserve, which entails selling securities with short maturities and buying securities with long securities in order to push down longer interest rates. BIS central bankers’ speeches  9  Falls on stock markets in Sweden and around the world have also reduced the financial wealth of the households.
So, even if increased trade with the more rapidly growing markets in the BRIC countries may boost Sweden’s export industry somewhat, we can also expect negative thirdcountry effects from a slowdown in the United States and the euro area. Financial channels However, it is not only through trade that Sweden is affected by weaker economic development abroad. We are also affected through the financial markets. These markets have become increasingly interlinked, which is illustrated not least by the recent turbulence on the stock market. As Figure 6 shows, share prices on the various stock markets are highly correlated. Share prices have fallen on the stock markets of the world recently. However, the fall has been particularly substantial on Stockholmsbörsen, which has fallen by 21 per cent since the turn of the year, while the Dow jones index and S&P 500 index have fallen by 1 and 4 per cent respectively. The Swedish households’ holdings in shares in companies listed on Swedish market places have increased by over 475 per cent since the early 1990s.4 This means that the fall in share prices entails a reduction in wealth, which has a certain restraining effect on Swedish household consumption. This in turn has an impact on growth and employment as household consumption, adjusted for its import content, constitutes around 35 per cent of GDP in Sweden.