Chat with Stefan Ingves 9 April 2014

• Is it true that pay rises create inflation? Isn't it the creation of money by private banks that drives inflation? Because they add new money into the economy, which presumably undermines the value of money, while pay rises just move money from one place to another.  

Henrik J (13:31)

Answer: Over the short term, it's actually both. The banks lend money, which increases demand, and so prices rise. If wages rise, companies have to be compensated, and so prices also rise.

• I don't understand what you're doing and would like you to explain. I thought you'd started to focus more on inflation now, despite which you still can't get the CPIF up to 2% over the forecast period. Why don't you lower the repo rate, considering this forecast? Don't you believe in your own forecast?  

Edward Linderoth (13:35)

Answer: We always believe in our own forecast and take action to bring inflation back on target at a reasonable rate. And that’s how it is this time too. At the same time, we need to keep an eye on the development of household debt.

• At the Riksbank, you often say that there are major risks in households' high levels of indebtedness. Could you be a little more specific about these risks?

Anders (13:36)

Answer: If debts are too large and something unforeseen happens, people will find it difficult to pay, consumption will fall and both individual households and the economy as a whole will encounter problems lasting many years.

• Hi Stefan Ingves! You've now decided to let the repo rate remain at the very low rate of 0.75%. According to your forecast, it will be at 2.65% by Q1 2017, which is a good way from the normal level of 3.50%–4.50%. Do your forecasts now have a new normal level for the repo rate?

Patric (13:37)

Answer: No, we don't have any new normal level for the repo rate. At the same time, you're completely correct. It'll take many years for the repo rate to get back up to four per cent again.

• Why is Sweden's policy rate higher than the ECB's? This is impacting on the Swedish export industry.

Magnus Olofsson (13:42)

Answer: We don't have anything like the same economic troubles that exist within the EMU. Swedish growth is twice as high, our financial market functions and our banks are well-capitalised. Here in Sweden, households and companies can borrow at interest rates that are on about the same level as in the EMU or, in certain cases, lower.

• When do you think it'll be worth saving instead of borrowing in Sweden again?

Rut (13:43)

Answer: Just now, interest rates need to be low so that inflation can rise. When economic activity improves and growth picks up, interest rates will increase, at which point saving will become worthwhile again.

• The low inflation rate argues in favour of retaining the very low repo rate of 0.75%, but household debt argues that you should start to raise the repo rate. How hard is it to balance these factors when you're deciding on the level of the repo rate?

David (13:45)

Answer: Yes, naturally it's not easy to strike a balance when we have to take these decisions. It's also important that other policy areas (taxes, banking regulations, repayments etc.) contribute towards managing the debt issue. This makes our decisions easier.

• Hi Stefan Ingves. In 1995, the repo rate was 8.91%. Do you think that the repo rate will ever come up to this level again?

Bertil (13:47)

Answer: It can't be ruled out but it certainly won't happen in the near future. It would take completely different economic conditions, including considerably higher inflation than we have today, for the repo rate to reach this level.

• When you look to the future, what do you consider are the greatest, most significant factors for the future development of inflation in Sweden? How much of the development of inflation is governed by domestic variables and how much by overseas variables?

Peter Ekström (13:50)

Answer: Over the last year, both have pulled in the same direction, leading to low inflation. What we now see ahead of us is a period of increasing demand, both abroad and in Sweden. This will make inflationary impulses similar, both from abroad and domestically. However, in a small open economy like Sweden, it is always difficult to know exactly how these inflationary impulses will be at any given point in time.

• Hi Stefan Ingves! Household debts are now in excess of SEK 3,100 billion and growing at an annual rate of about 5%. When will you at the Riksbank consider that this 'debt mountain' is too big? Wouldn't a repo rate increase be the right medicine now?

Magnus (13:53)

Answer: I think that these debts are already too high. Large debts can lead to economic problems later on and this is something we'd like to avoid. The repo rate forms part of this, but other measures are also needed, e.g. taxes, repayments and regulations in the banking sector.

• In Prospera's inflation forecast from this morning, money market participants are now saying that inflation of 1.8 per cent is expected 5 years ahead. Isn't this worrying? Shouldn't we be having serious doubts about your ability to bring inflation back to the target of 2 per cent?

Bo (13:55)

Answer: Inflation expectations are important and it's important that they stay close to two per cent, but they also vary somewhat over time. Inflation is now going to rise and inflation expectations will then gradually adjust to the increasing rate of inflation.

• Hi Stefan! We're two students from Linköping University who wonder what your position is on the European Monetary Union and whether you think Sweden should join.

Maria Hiller (13:57)

Answer: This is a question for Sweden's politicians to decide. It's not a question for the Riksbank.

• Hi Stefan. What's the main reason for the low inflation? And if we had a zero interest rate, would it really boost inflation or would it only get households to borrow until Sweden's economy was in ruins?

Anna (13:59)

Answer: Inflation is low because demand has been weak in many parts of the world. At the same time, it's been difficult for Swedish companies to increase consumer prices. Both of these effects have led to low inflation. The low interest rates are making it easy to borrow and this effect is simultaneously pulling in the opposite direction. This is particularly the case now that economic activity is improving.