How can the Riksbank steer interest rates?
The reason why the Riksbank can steer the interest rates in the economy is that the Riksbank can always determine at what interest rate a bank may deposit or borrow money from the Riksbank. In this way other interest rates in the economy are also affected, and ultimately economic activity and price movements.
Banks can borrow from or deposit money in the Riksbank overnight, whenever they want to. The interest rate on these loans and deposits is called the overnight rate. The banks’ other short-term interest rates are affected by how the banks believe the overnight rate will develop.
Expectations affect longer interest rates
However, longer interest rates are also affected by other factors. Interest rates with durations of more than two years are not affected to the same extent by expectations of how the interest rate will change in the immediate future. Instead it is expectations of how inflation, and thereby monetary policy, will develop in the long term that is important. Expectations of stable inflation can therefore also stabilise the long-term rates.
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You can find more information about how the Riksbank steers interest rates under the links below.