03 Aug 2004 - 09 Apr 2021
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Notes & coins
Decisions and communication
The transmission mechanism
DID YOU KNOW THAT
Low inflation rate in Sweden
Zimbabwe is the country that currently has the world’s highest inflation rate. In 2003, prices in Zimbabwe rose by over 300 per cent. Inflation in Sweden was around 2 per cent in 2003.
Inflation targeting regime
Sweden was in January 1993 the fourth country to introduce a formal inflation targeting regime. New Zealand was the first country, followed by Canada and the U.K.
The objective of monetary policy
According to the Sveriges Riksbank Act, the objective of monetary policy is to “maintain price stability”. The Riksbank has interpreted this objective to mean a low, stable rate of inflation.
More precisely, the Riksbank's objective is to keep inflation around 2 per cent per year, as measured by the annual change in the consumer price index (CPI). There is a tolerance range of plus/minus 1 percentage point around this target. At the same time, the range is an expression of the Riksbank’s ambition to limit such deviations. In order to keep inflation around 2 per cent the Riksbank adjusts its key interest rate, the repo rate.
MONETARY POLICY STRATEGY
Monetary policy in Sweden
The inflation target was formulated in 1993 and the strategy for monetary policy has since then evolved gradually in response to practical experiences in Sweden and other countries and to new findings in academic research. The most important aim of the strategy is to explain how the Riksbank, when setting its interest rate, takes into consideration both developments in inflation and in the real economy.
THE TRANSMISSION MECHANISMS
Monetary policy channels
The channels through which a change in the repo rate influences inflation and the rest of the economy are called the transmission mechanisms of monetary policy. One widely held view regarding these mechanisms is that it takes time for a change in the repo rate to have an impact on inflation. For this reason, the Riksbank’s monetary policy decisions are based on a forecast of inflation and economic activity in the period ahead.
LAST UPDATED 3/10/2006
Monetary Policy Department