Svensson: Monetary policy, debt and unemployment
Monetary policy and the policy rate have only a small effect on housing prices and household debt, but a relatively large effect on inflation and unemployment. It is therefore not possible for monetary policy to tangibly reduce the potential risks in household debt without clear prejudice to the Riksbank’s mandate to maintain price stability and attain the lowest sustainable rate of unemployment. This was stated by Deputy Governor Lars EO Svensson when he held a speech at SNS on his views on the relationship between monetary policy, debt and unemployment. If the risks with household debt are considered too high, one should instead use other available measures, such as the loan-to-value cap and risk weights for mortgages.
Mr Svensson began by noting that the Executive Board members' different views on monetary policy mainly concerned whether or not household debt is too high and if so, whether monetary policy should be used to try to limit the risks entailed.
He said that extensive analyses using data from many countries, as well as the Riksbank's own inquiry into the risks in the housing market, have shown that monetary policy has relatively little effect on housing prices and household debt, but relatively large effect on inflation and unemployment. If household debt creates problems, Mr Svensson said there are better ways of limiting this debt. For instance, the loan-to-value cap has proved to have a good effect. The loan-to-value ratio for new mortgages is now falling for the first time since 2002. Other measures, such as reduced tax deductions for interest payments and higher risk weights on the banks' mortgages, are also available.
However, Mr Svensson also wondered whether household debt actually entailed such a large risk that it needed to be addressed. Firstly, according to Finansinspektionen (the Swedish financial supervisory authority), households have very good resilience to higher interest rates, falls in housing prices and increased unemployment. Secondly, households have financial and real assets that are three times as large as their debt. Thirdly, the high housing prices in Sweden are essentially due to fundamentals, and there is no sign of any bubble, according to the Riksbank's inquiry. This means that the situation in Sweden looks different than that in the countries suffering a crisis.
Mr Svensson concluded by noting that the discussion among members of the Executive Board on these issues was good, as it clarifies the differences of opinion. The Riksbank's analysis can now focus on further clarifying these issues and can hopefully help us to move forward in this field.
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