Chat with Stefan Ingves 16 December 2014

Many thanks for all of your interesting questions about Swedish monetary policy.

Merry Christmas and see you again in 2015.

• Hi! The Swedish krona has declined in value from 8.40 to 9.40 against the euro over the last year. This means that we get about 12% less to spend when we visit a euro area country on holiday. What's going to happen to the krona in the future and why has it fallen in value when Sweden's economy has been doing well?

Mario (13:31)

Answer: It's hard to say what determines exchange rates. In the short term, the zero interest rate could play a part. In a few years' time, we expect the krona to strengthen as the Swedish economy continues to improve.

• Hi Stefan. Has today's repo rate reached rock bottom or could you introduce a negative interest rate if inflation continues to be too low?

Patric (13:33)

Answer: The most likely scenario is that the zero interest rate level will last until we raise the repo rate in the second half of 2016. From a completely technical point of view, we could introduce negative interest rates. This would mean that there would be a fee for depositing money in the Riksbank.

• Hi Stefan. Is the normal level for the repo rate still between 3.5% – 4.5%? Because that feels very far away right now.

Magnus (13:33)

Answer: Yes, the normal level still applies but it will take a good long while for us to get there.

• Hi Stefan. Was the Riksbank's decision at all affected by the current government crisis and the extraordinary election to be held in March 2015?

Anders (13:34)

Answer: No, that had no influence whatsoever on yesterday's decision.

• Hi Stefan. How many central banks around the world have policy rates of 0.00%? And do any have negative interest rates?

Carl (13:36)

Answer: As far as I know, nobody else has exactly a zero interest rate, but several have very low interest rates, e.g. 0.05 or an interval of 0–0.25.

• Why is it so important to attain the CPI? What is there to say that the components forming this measure make it the right measure to chase? Do other countries have different definitions of the inflation measure that they try to reach?

Daniel (13:38)

Answer: The CPI is the best-known measure of inflation developments in Sweden. Most other countries with inflation targets also use a consumer price index of some kind as a target variable. A stable CPI, in our case 2 per cent, is an expression of predictable and even economic development.

• How do you know that a zero interest rate will make the wheels spin faster? What's that law of nature called? If you ask me, this is a strong signal that something is deeply wrong, and I'll be tightening my belt in the future – doing my shopping on the Internet, for example, and cancelling my newspaper subscription. This will save me SEK 4,000 per year and will let me avoid intrusive advertising that just puts me in a bad mood. Why does your chat want to know what 3+7 is? It feels like it's spying on me!

G K (13:40)

Answer: A low interest rate makes it cheap to borrow, so people borrow more than they would otherwise. A low interest rate also makes it relatively unprofitable to save in a bank, so people consume instead. In both cases, the wheels are kept spinning so that prices rise and we reach our inflation target of two per cent.

• Is there a recession on the way?

Peter sandgren (13:42)

Answer: No, not as far as we can see. According to our forecast, growth will be 2.6% in 2015 and 3.3% in 2016. This is far from being a recession, which of course involves the economy shrinking.

• Hi Stefan. Which is the more correct description of a 0% interest rate – that we have a very, very low interest rate or that we don't have any interest rate at all?

David (13:44)

Answer: A zero interest rate refers to the interest rate at which the banks deposit money with the Riksbank. It doesn't mean that private individuals can borrow from a commercial bank at zero per cent. This is because the banks have a cost for their borrowing and also have to cover other expenses.

• Stefan, what do you feel are the risks associated with a negative repo rate, should that path be taken?

James (13:47)

Answer: When the policy rate is zero, all other alternatives have their positive and negative sides. A negative rate is one option but, by far, not the only option. The effect of the negative rate is partly determined by the level of excess liquidity in the financial system, so to pass judgement on the net result of a negative deposit rate at the central bank is a nontrivial exercise.

• Hi Stefan. You mentioned fixed interest-rate loans as a possible measure, if necessary. The last time you did this, your repo-rate path was below market expectations. By issuing loans at low interest rates for long maturities, you could support the repo-rate path and also lower market expectations. At present, market expectations are lower than your repo-rate path, so how can this kind of fixed interest-rate loan be relevant today?

Fia (13:52)

Answer: If monetary policy needs to become more expansionary, this will primarily involve deferring repo-rate increases. If we need to do more, we can work with the quantity of money, instead of its price. This will affect the general interest rate level sooner or later, regardless of what interest rate expectations may be when such a policy is introduced.

• Why aren't price increases on real property included in inflation? In other words, the Riksbank is lying when you claim that inflation is inadequate. In reality, it's frighteningly high and is creating unjust divisions in society. And who's going to pick up the tab for all the interest-only loans, at zero interest rates, that the people of this country have? Will it be the government, i.e. the printing press and pensioners' savings? It's no exaggeration to say that the earned income tax credit has gone towards the increased debt ratio. It's an affront to everybody saving for their pension. Mistreating pensioners with an unfair punitive tax and sky-high rents will not increase consumption, which seems to be the goal for a mindless central bank and economic policy. Assume that I have a property and no debts – am I now supposed to borrow and consume a load of stuff I don't need that will only end up on an already-overfull rubbish tip in a year or so? Then I sell my property so that somebody else has to pay off more loans in the future? I don't have the least faith in current economic thinking. It's utter madness.

G Karlsson (13:57)

Answer: Inflation is measured in terms of the CPI and is used to measure living costs. Statistics Sweden, which has made the assessment of how the CPI is to be calculated, is of the opinion that the cost of living can't be measured properly if property prices are included. Instead, they attempt to measure other costs linked with living, such as interest expenses and maintenance costs.

• Do you see any risk that the market is losing confidence in central banks in general? If central banks have tried to reach an inflation target for many years without success, this could indicate that you can't do it, which the market will soon realise. What are your thoughts about this risk?

Edward (13:59)

Answer: As a central bank, we can always make inflation rise, so I'm not worried in that respect. The difficult part is increasing inflation in a systematic and controlled way. Our assessment is that this is entirely possible if the repo rate remains at zero until the second half of 2016.