Heikensten: Direct changeover from 2006 lessens the risk of payment system disturbances

Governor Lars Heikensten spoke at SNS's Monday Club in Stockholm on some issues to do with the Riksbank and EMU.

"First let me comment on the timing of full EMU participation by Sweden. The message from the Government is that, given an affirmative referendum this autumn, Sweden is to strive to enter the monetary union on 1 January 2006. That means a so-called direct changeover or 'Big Bang': the conversion of all electronic transactions in society occurs concurrently with the exchange of notes and coins. This is good news for the financial sector, where the Riksbank is closely involved in the preparatory work via the SIFS group, and lessens the risk of payments system disturbances", Mr Heikensten said.

Mr Heikensten went on to comment on ERM and economic policy. "Before joining the monetary union, Sweden is expected to participate in ERM2, which most countries in Europe see as an antechamber to EMU. The decision is a matter for the Government but it requires the approval of all the existing euro and ERM2 countries, the ECB and the Riksbank. Once we are there, the responsibility for stabilisation policy will rest more and more on fiscal policy. But that does not mean that the Riksbank should refrain from using the room for manoeuvre that monetary policy may have during the ERM2 period. The Riksbank is to do what is possible to ensure that Sweden's adherence to the monetary union can occur in a smooth manner. Low and stable inflation in Sweden is an important element in this context; another is a stable exchange rate. Sweden will have to fulfil the convergence criteria in both these respects. The practical consequences of this are that there are grounds for continuing to make inflation forecasts and to publish inflation reports in much the same way as at present. We shall also do what we can with the interest rate to steer inflation towards our target. But the closer we come to full EMU participation, the less will be the impact of repo rate adjustments on other interest rates. That is because the shorter the remaining period before the entry date, the more will the Swedish yield curve be dictated by the European level of interest rates", Mr Heikensten said.

Finally, Mr Heikensten referred to the ongoing discussion about how stabilisation policy should be conducted in Sweden in the event of full participation in the monetary union. "It's a good thing that this question is being examined from different angles; it's important to consider how we, as EMU participants, can manage to create good conditions for a stable development with persistently low inflation. The starting point for the Riksbank's submission on the report from the enquiry into stabilisation policy in EMU (SOU 2002:16) is the same as that of the enquiry: improvements to the framework for stabilisation policy may be needed if Sweden joins the monetary union. In this context the Riksbank focuses primarily on the problem of overheating, which caused difficulties in Sweden on a number of occasions in the 1970s and '80s. A period of unduly rapid price and wage increases leads in time to lower growth and employment. The question is how a system should be designed to ensure the consistent and disciplined policy that gives the best development in the long term", Mr Heikensten said.

"In its submission the Riksbank stated that major components of monetary policy's existing framework should be transferable to fiscal policy. It's a matter of setting up clear objectives for stabilisation policy, be they an output target as the enquiry recommends, an inflation target as the Riksbank wants to have assessed, or some combination of the two. It's also a matter - no less important - of having clear decision-making processes and rules of action. Who is to make which decisions and when are they to do so if developments are not taking the desired course? Who is accountable? The situation in this respect has been clear in recent years: the Riksbank is responsible, the instrument at our disposal is the repo rate and we have acted when forecast inflation has deviated from our target", Mr Heikensten continued. "There may be a case in this context for considering whether stabilisation policy decisions in a limited framework can be taken directly by the Government in order to shorten the long decision-making procedure that fiscal policy has to manage. This is a complex issue but I believe it is important to discuss it together with the other aspects", he said.

"It is also important that the decisions are made with great transparency. They can then be understood and assessed, which means that they can help to exert beneficial pressure on those who are responsible", Mr Heikensten pointed out. "It may be worth recalling that the inflation-targeting policy was strongly questioned to begin with. Many people thought it wouldn't work. But the framework has been gradually refined and there has been a growing understanding. I'm convinced that in the same way it is possible to create a transparent, clear and efficient framework for fiscal policy. That could lay a firm foundation for a stable economic development if Sweden participates fully in EMU", Mr Heikensten concluded.