Chat with Stefan Ingves 15 February 2011
Governor Stefan Ingves chatted in Swedish on the Riksbank's website. This is a translation into English of the questions and replies.
Is the tax deduction for interest a fundamental error that affects the choice of interest rate path. The feeling is that a tool aimed to steer the market as a whole is being used too bluntly in mortgage rate policy. Mathias
Reply: The tax deduction for interest is a question for politicians, this question does not affect the choice of interest rate path at present.
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Are you less worried today than you were a couple of months ago about the housing market? patrick
Reply: We are closely following developments and we will have to see what effect Finansinspektionen’s (the Swedish Financial Supervisory Authority) mortgage ceiling and our interest rate increases will have. Both make it more difficult to borrow.
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Some articles are now being written that a downturn in house prices is approaching. This should be an issue you know a lot about. How do you think the housing market will respond to these coming repo-rate increases? Mortgageholder Visby
Reply: Increases in interest rates mean it becomes more expensive to borrow and this includes loans to buy housing. This should mean that prices do not rise at the same rate as before.
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Before the mortgage rate was around 1% above the repo rate. The banks’ levels are now up at around 2% above the repo rate. How much does this affect your reasoning about what is required when increasing the repo rate? Björn
Reply: On this occasion, not at all, it is not so surprising that the interest rate margin for mortgages has increased as previously it was far too small, given the risks in the system. It is most likely that the margin will remain higher than before, partly because of the new regulations.
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According to your forecasts there is a small probability that the repo rate will be negative in a year or so. Would this mean that the banks got paid to borrow money? Wouldn’t all of the banks then want to borrow as much as possible to maximise their profits? Has the interest rate been negative at any point in the history of the world economy? Fredrik
Reply: During crises the repo rate in itself has not been negative, but for a while one had to pay to deposit money in the Riksbank (= negative interest rate). That measure did not have any major importance for the monetary policy conducted. Normally, the repo rate will always be above zero. In the long term, our assessment is that a normal level for the repo rate is around 4 per cent.
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Are the Swedish banks among the most secure in Europe, which is implied by their earnings, or do you envisage problems for them in the future? Björn
Reply: Yes, at present the Swedish banks are among the best-capitalised banks in Europe. This has not always been the case, and it requires caution in the future, too.
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Hi! What relationship do you and the Riksbank see between the interest rate and inflation? Peter
Reply: An increase in the repo rate means we will attain our inflation target of 2 per cent. On the other hand, if we did not increase the repo rate, prices would rise and the inflation rate would soon be higher than our target level. This applies right now. Earlier during the recession everything was moving in the opposite direction. Then it was necessary to cut the repo rate substantially so the inflation rate would not be too far below the target.
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Does the Riksbank take into account any other factors than inflation when deciding on the repo rate? Carl-Henrik
Reply: Yes, we study in great detail what is happening abroad and how growth, unemployment, productivity and wage increases are developing in Sweden.
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The two largest counter-arguments to the interest rate increase among laymen are 1) the interest rate increase in itself raises inflation and 2) the krona will become too strong and we will lose competitive advantage in exports. Your counter-arguments? Adam Dahlquist
Reply: The direct effect of interest rate increases on the CPI can be discounted when considering the inflation rate in the short term, and in the long term it evens itself out. If the krona strengthens, this affects exports to some extent, but we expect that exports will continue to rise now, too, and monetary policy is primarily intended to manage the inflation rate, which would become too high without the policy rate increases.
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Hi Stefan, What do you think about Sweden’s interest rates beginning to be disconnected from the euro? Is Sweden really so individual that its interest rates should only be governed by domestic factors? Max
Reply: It is not only domestic factors that determine the interest rate. Events in the world economy also play a major role, but with a floating exchange rate and an inflation target we can, and should, adjust our interest rates primarily according to Swedish conditions. This is why we do not follow the ECB’s interest-rate setting.
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According to your forecast, we will continue to have a negative real interest rate (before tax) for a further year. How do you think this affects willingness to speculate in assets instead of investing long-term? Robert Johansson
Reply: Yes, in a historical perspective the interest rate will remain fairly low. We are gradually tightening our monetary policy. Towards the end of the forecast period we will approach a normal level. Then we can also assume that the real interest rate is positive.
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Hi, why aren’t you unanimous on the decision to increase? Regards, Peter
Reply: With six members on the Executive Board, and all with slightly different backgrounds, it is natural that we don’t all view economic developments and monetary policy in exactly the same way. However, on this occasion, too, the differences of opinion are fairly slight. Nor have we ever had the aim that everyone must agree. Each member is individually responsible for his or her decisions.
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Hi! Is it good for a country to have a strong currency, are interest rates also affected by this? Katarina
Reply: We do not have any target for the exchange rate, we set the interest rate to attain our inflation target and then the exchange rate adjusts to this. Good growth, stable public finances, low inflation and surplus in foreign trade usually lead to a stronger krona.
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Why are the increases only in stages of 0.25%? Why not larger increases each time, such as 0.5-1%? Erik Albrecht
Reply: The pace of the repo-rate increases is our own choice, but experience shows that 0.25 is normally the size that works best for an increase, or cut. Monetary policy is usually based on a gradual adjustment of the policy rate in relation to current economic developments.
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USA’s policy rate is at almost zero, as is Japan’s, the EU is at one %, is there a risk that the Riksbank is moving forward too quickly? Alexander
Reply: No, not that we can see. Economic developments in Sweden and the inflation rate are such that the policy rates you mention are far too low for the Swedish economy if we are to attain our inflation target of 2 per cent.
