Monetary policy and financial stability

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Monetary policy and financial stability Counteracting the effects of the global financial crisis Riksdag Committee on Finance, 13 November 2008Governor Stefan Ingves

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The Riksbank’s tasksMaintain price stability Promote a safe and efficient payment systemPresently requires continuous measures to counteract the effects of the international financial crisis We are prepared to act quickly and forcefully when necessary

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Monetary policy and financial stability Tasks that are closely connected… ”Physical” and ”financial” infrastructure Managing risk, saving and borrowing Investments that can create employment and growth Monetary policy works via the financial system Monetary policy is also important for financial stabilityIt is important for economic growth that the financial system is stable

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The financial systemMacroeconomic developments and financial marketsThe payment systemBank groupsLenders and borrowers

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Hiccup in the machinery Interbank rate and the repo rate Per centSources: Reuters EcoWin and the Riksbank

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Mortgage rates have risen more than the repo rate Per centSources: Reuters EcoWin, SBAB, Statistics Sweden and the RiksbankRefers to three-month mortgage rate from SBAB, three-month interbank rate and monthly average for three-month mortgage rate for institutions’ new lending.

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To ”promote a safe and efficient payment system” Preventive work and preparedness to take actionRegularly analyse threats and risks to financial stability Preparedness and crisis exercises Various tools when shocks occur, such as; Information and dialogue with the market Supply liquidity on special terms Contact and cooperation with other authorities, in Sweden and abroad

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The Riksbank’s measures to ensure the financial system will function more normallyLoans in SEK and USD against collateral and at an interest rate Special loan facility in SEK with new commercial paper as collateral Changed collateral requirements Liquidity assistance to; Kaupthing Bank Sverige AB. Carnegie Investment Bank AB Note: Carnegie is now owned by the Swedish National Debt Office and the Riksbank’s liquidity assistance has been repaid

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Measures taken by the stateRiksbank SEK 390 billion Swedish National Debt Office SEK 116 billion Has taken over Carnegie Investment Bank AB Guarantee programme (max total SEK 1500 billion) Government Finansinspektionen (Swedish Financial Supervisory Authority)

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Monetary policy and the international financial crisis A small, export-dependent economy Affected by international developments Counteract the effects of the crisis! Could otherwise hit inflation and growth hard Monetary policy can alleviate the effects Other measures required to solve the problems entirely

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Financial turmoil and the inflation target Situation changes rapidly in mid-September Repo rate has been cut to 3.75 per cent Further cuts over the coming six months To: …alleviate the effects of the financial crisis on economic activity and… …manage the inflation target of two per cent

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Behind the interest rate decision Financial turmoil important Impact of interest rate cuts (initially) Credit crunch Falling wealth Deeper economic downturn Uncertainty and falling exchange rate Falling commmodity prices Lower inflationary pressures

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Pessimism among households… Net figuresSource: National Institute of Economic Research

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… and in the business sector Seasonally-adjusted index and net figures, manufacturing industrySources: National Institute of Economic Research and SwedbankNote. Index above 50 indicates growth, below 50 a decline.

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Poorer prospects for world economic activitySources: Bureau of Economic Analysis, Eurostat and the Riksbank

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Lower oil price Brent crude, USD per barrelNote. Futures are calculated as a 15-day average.Sources: Intercontinental Exchange and the Riksbank

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Falling commodity prices USD, index (2000 = 100)Source: The Economist

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Weaker krona Trade-weighted exchange rate (TCW), index, 18 November 1992 = 100Note. Broken lines refer to the Riksbank’s forecasts (quarterly data).Source: The Riksbank

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Lower growth in the world and in Sweden Annual percentage change, calendar-adjusted dataSources: The IMF, Statistics Sweden and the RiksbankNote. Broken lines refer to the Riksbank’s forecasts

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Lower employment Thousands, seasonally-adjusted data, 3-month moving averageNote. Redundancies include outcomes for OctoberSource: Swedish Public Employment Service

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Lower inflation CPI, annual percentage changeSources: Statistics Sweden and the RiksbankNote. Broken lines refer to Riksbank’s forecasts

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Lower repo rate Per cent, quarterly averageSource: The RiksbankNote. Broken lines refer to the Riksbank’s forecasts

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Uncertainty in the forecasts Global economic activity and financial crisis worsen Higher inflationary pressures Weaker krona Poorer impact initially

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Repo rate with uncertainty bands Per cent, quarterly averagesNote. Broken lines represent the Riksbank’s forecast.Source: The Riksbank

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A concluding reflectionIn the early 1990s Bank Support Authority and a crisis created mainly on home ground This experience provides better resilience now Shortcomings in the global financial system Measures in both short and long term Fix what is broken so it will work better in the future!

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Last Updated: 8th March 2018

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