Monetary policy is the policy that affects a country’s interest rates, money supply and the value of money. In Sweden it is the Riksbank that has been given responsibility for monetary policy by Sveriges Riksdag, the Swedish Parliament. But the Riksbank cannot choose to do whatever it likes with monetary policy. The Riksbank has determined by law that the objective of Sweden’s monetary policy is to safeguard price stability. The Riksbank has specified this as a target of 2 per cent. The Riksbank affects inflation in Sweden by means of the interest rate.
When the Riksbank changes the policy rate, total demand is affected and ultimately also inflation, through various channels in the economy. The cost of borrowing and the compensation for saving are affected, as well as the demand for the good exported and imported, as the exchange rate is also affected.
Monetary policy acts with a time lag
It takes time before a change in the interest rate makes a full impact via these channels. One usually says that it takes around one to two years. Monetary policy is therefore based on forecasts of economic developments over the coming three years. By influencing the strength of demand in the economy, the Riksbank tries to steer inflation so that it is normally close to the inflation target of 2 per cent within two years. This should be attained without inflation and the real economy fluctuating too much.
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