Öberg: Monetary policy, financial stability and the Riksbank's balance sheet
First Deputy Governor Svante Öberg
Lund University, School of Economics
The Riksbank has over the past year taken forceful action to limit the negative consequences of the financial crisis. Monetary policy has been aimed at dampening the fall in economic activity; the repo rate has been cut to an extremely low level and supplemented with lending to the banks with longer maturities to be able to also influence interest rates further along the curve. The measures to safeguard financial stability have been aimed at providing the banks with funding in SEK and USD. The possibilities to provide the financial sector with loans in foreign currency and to be able to meet the increased international commitments have been reinforced by the swap agreements with the ECB and the Federal Reserve and the borrowing through the Swedish National Debt Office.
During the financial crisis and the ensuing economic downturn the link between the Riksbank’s two main assignments – monetary policy and financial stability – has been reinforced. The Riksbank has implemented extraordinary measures in both areas to be able to carry out its tasks. It is primarily through changing the terms for various items on the balance sheet that the Riksbank has carried out its two tasks during the financial crisis. Mr Öberg’s speech uses the Riksbank’s balance sheet as a basis for describing how the Bank has implemented its monetary policy and the measures it has taken to stabilise the financial sector during the financial crisis.
There are clearer signs that the world economy is beginning to recover, and the financial markets are gradually functioning better. As the financial sector stabilises, the need for extraordinary measures will decline. According to the forecast the Riksbank made in October, the repo rate will probably need to begin being raised in autumn 2010.
The question with regard to phasing out the extraordinary measures is when and how we should phase out the loans to the banks. The Riksbank, unlike many other central banks, has not purchased any securities, which makes phasing out the support measures relatively uncomplicated. The dollar loans have already ceased, as it became cheaper for the banks to borrow dollars on the market than through the Riksbank. The loans in kronor may be concluded in October 2010 as long as no decision is taken on new loans.
The extraordinary measures will thus cease once the economy has recovered, and the situation in the financial sector has stabilised. The Riksbank’s balance sheet will then decline. However, the financial crisis has shown that we should maintain a greater readiness to meet any new problems than we had prior to the crisis. How this might affect the balance sheet is a question the Riksbank will be considering over the coming period.
Read the whole speech in the PDF file below.
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