Ingves: Monetary policy entails a balancing act
In a speech in Luleå on Tuesday, Governor Stefan Ingves spoke about some aspects of the difficult balancing act that monetary policy has to perform and that in many respects reflect the lessons we have learned from the latest financial and debt crisis. Mr Ingves began by noting that although the Swedish economy has been affected by the crisis we have coped relatively well so far. However, as growth prospects have weakened over the last 12 months, the repo rate has been cut in order to attain the inflation target and support economic activity.
Sweden’s stable public finances and good competitiveness are among the reasons why the Swedish economy has coped relatively well during the crisis. Another reason why Sweden has done so well is that we have not suffered a crash on the housing market. However, as household indebtedness is now very high the households are more vulnerable to factors such as a fall in housing prices.
The course of events in several countries during the financial and debt crisis shows that we must take risks of this type seriously. Mr Ingves pointed out that an excessive build-up of debt – irrespective of whether it takes place in the private or public sector – leads to problems sooner or later, and that developments in the euro area in recent years provide a frightening illustration of this.
He noted that few other tools for managing the risks associated with household indebtedness are in place in Sweden today and that monetary policy has its part to play. He repeated therefore that “the less others do, the more monetary policy has to do”. “I believe that one of the most important lessons of the financial crisis is that financial stability and monetary policy are interlinked. Financial stability is a precondition for monetary policy being able to work as intended, while monetary policy can affect financial stability. It is therefore rather natural to take the risk of financial imbalances into account in monetary policy,” said Mr Ingves
He concluded by saying that “we need to take into account the risks associated with household indebtedness in our repo rate decisions. Our balancing act in October resulted in an unchanged repo rate, but a downward adjustment of the forecast for the repo rate. Such a monetary policy means that we can, on the one hand, attain the inflation target and stabilise employment in the long term and, on the other hand, take the risks associated with financial imbalances into account. But monetary policy alone cannot eliminate the risks associated with household indebtedness that I have discussed today. It is therefore important to have a wide-ranging discussion among several authorities in Sweden about the need for additional measures.”
Read the whole speech.
