The Riksbank is Sweden’s central bank and an authority under the Riksdag, the Swedish parliament. According to the Sveriges Riksbank Act, the Riksbank is responsible for monetary policy with the objective to maintain price stability. The bank has also been given the task to promote a safe and efficient payment system.
The Riksbank’s interpretation of the objective of price stability is that inflation should be kept at a low, stable rate. The Riksbank has defined its price stability objective as an increase in the consumer price index of 2 per cent. A tolerance margin of plus/minus one percentage point around the target has been specified. This aim for monetary policy provides good conditions for favourable and sustainable economic growth.
During the 1970s and 1980s inflation rose considerably in many countries and hampered conditions for growth and employment. Most central banks around the world therefore focus, like the Riksbank, on maintaining inflation at a low, stable rate that companies and households can rely on when planning their financial activities.
The Riksbank’s primary instrument for influencing inflation is known as the repo rate – the interest rate the banks pay when borrowing from the Riksbank. The repo rate affects economic activity in Sweden and thereby the inflation rate. The Riksbank’s interest rate decisions are mainly based on a forecast of the path of inflation one to two years ahead. This forecast horizon is the time required for a change in the interest rate to make full impact on prices.
The payment system and the supply of credit play a central role in ensuring the economy functions efficiently. A problem in one of Sweden’s major banks risks disrupting fundamental functions in the mediation of payments and supply of credit. The experiences of the banking crisis in the early 1990s have certainly not been forgotten.
The Riksbank publishes a twice-yearly report on the stability of the Swedish financial system. In this report, the Riksbank assesses the risks of problems arising in the major Swedish banks and in the central financial infrastructure. The banks’ customers - the household, corporate and property sectors - are analysed in special sections, as problems among them would be reflected in increased risk-taking in the banks. Price trends in the property market are closely monitored, as property is an important source of collateral for the banks. Other risks in the banks’ balance sheets (in addition to credit risks) are also examined. The Financial Stability Report provides a basis for discussions with the banks and other financial agents on the risks in the financial system. However, there is no instrument similar to the repo rate for directly influencing the Riksbank’s stability objective. The Riksbank shares responsibility for promoting financial stability with Finansinspektionen (the Swedish Financial Supervisory Authority) and with the Riksdag Committee on Finance.
The Riksdag decided at the end of the 1990s to give the Riksbank an independent status. Its aim in formally delegating the task of maintaining price stability to the Riksbank was that monetary policy would gain a clearer long-term perspective and this would create better conditions for credibility. The responsibility for setting the repo rate has been with the Executive Board of the Riksbank since 1999. The repo rate determines what the banks have to pay to borrow from the Riksbank. This rate affects interest rate costs for households and companies and thereby economic activity as a whole. Over the past ten years the Riksbank has worked on making its operations more transparent and predictable. The transparency contributes to making it easier to assess the Riksbank’s activities and to creating confidence in monetary policy.
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