Monetary policy with an inflation

target

The world’s oldest central bank

1668Sveriges Rikes

StändersBank

1661Palmstruch -

first banknotes

1701The Riksbank

issues “transport” notes

1830sCommercial banks

are established

1904Monopoly onissuance of banknotes

1866Sveriges Riksbank

1999New legislation

makes bank independent

An authority under the Riksdag

The Riksdag

The Government Sveriges Riksbank

The Ministry of Finance

The Swedish National Debt Office

Finansinspektionen (theSwedish Financial

Supervisory Authority)

Economic policy

Economic policy

Fiscal policy Monetary policy

The Riksdag and the Government The Riksbank

The Riksbank’s governing

The Riksdag

General Council11 members

Executive Board6 members

The executive board of the Riksbank

Eva SrejberLars Heikensten Irma Rosenberg

Kristina Persson Lars NybergSvante Öberg

Stefan Ingves

The Riksbank’s tasks To safeguard the value of money (=price

stability)

- Oversee and analyse monetary stability- Conduct monetary and exchange rate policy measures - Manage the foreign exchange reserve

To promote a safe and efficient payment system - Oversee and analyse stability in the payment system- Responsibility for the RIX system- Ensure the supply of banknotes and coins

UND1X inflation and historical meanAnnual percentage change

Sources: Statistics Sweden and the Riksbank

-2

0

2

4

6

8

10

12

14

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04-2

0

2

4

6

8

10

12

14UND1XHistorical mean

1970-19927%

1993-20051.7%

Different monetary policy regimes

Source: The Riksbank

0

5

10

15

20

25

89 91 93 95 97 99 01 03 0590

100

110

120

130

140

150

160

Short term interest rate, 3-month Treasury Bill (left scale)SEK measured as TCW (right scale)

Inflation targetFixed exchange rate

An independent Riksbank

Up to 1999: Conducted monetary and exchange rate policy.

General Council 4 years

Riksbank Governor 5 years

After 1999: Price stability

General Council 4 years

Executive Board 6 years

The Riksbank’s organisation

Executive Board

Administration Department

IT Department

Internal Audit Department

General Secretariat

Monetary Policy

Department

Market Operations Department

Financial Stability

Department

InternationalSecretariat

Research

Monetary policy theoryWhy a price stability target?

Monetary policy can not affect employment in the long run

Establishing inflation expectations

High and fluctuating inflation increases uncertainty and affects investment

Costly to hold back inflation

High inflation leads to redistribution of income and wealth

One instrument – one target

Inflation expectations by money market agents

Per cent

Sources: Statistics Sweden and Prospera Research AB

-2

-1

0

1

2

3

4

5

1994 1996 1998 2000 2002 2004 2006 2008 2010-2

-1

0

1

2

3

4

5Inflation expectationsCPIJan -95

Feb -06

Nov -05

Okt -05

Mar -05

Nov -04Feb -98

Feb-97

Feb -96

May -06 Oct -06

Nov -06

Why one to two years ahead?

Uncertainty over the transmisson mechanism

Reduce fluctuations in the real economy

CPI or UND1X? …..the change in the consumer price

index as from 1995 shall be limited to 2 per cent, with a tolerance for deviations of 1 percentage point.

General Council of the Riksbank 15-01-1993

howeverexcl. transitory effects (interest expenditure and indirect

taxes)

supply shocks – longer time horizon

Executive Board of the Riksbank 04-02-1999

-1

0

1

2

3

4

97 98 99 00 01 02 03 04 05 06 07 08 09-1

0

1

2

3

4UND1X

Forecast Inflation Report 2006:3

UND1X forecast, October 2006Annual percentage change

Sources: Statistics Sweden and the Riksbank

Within 2 years

Inflation forecasts 8 monetary policy meetings per year- 4 (3) Inflation Reports- 4 updated assessments- 2 public hearings before the Riksdag

Committee on Finance

Repo rate and implicit forward rate Per cent

Source: The RiksbankNote. 15-day average.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

04 05 06 07 08 09

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0Repo rateAverage up to 12 Oct 2006

UND1X with uncertainty bandsAnnual percentage change

Sources: Statistics Sweden and the Riksbank

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09-1

0

1

2

3

4

5

Monetary policy repo Repos are implemented weekly

Term of one week Liquidity forecast in the morning Repo announcement on Tuesdays 09.30-

09.45 Allocation at 10.00 Liquidity flow on Wednesday

lending/delivery of collateral Daily fine-tuning operations at 16.20-16.40

Policy rates & deposit ratesPer cent

Source: The Riksbank

0

2

4

6

8

10

96 97 98 99 00 01 02 03 04 05 060

2

4

6

8

10Deposit rateLending rateDeposit OvernightRepo rate

Signalling – influencing expectations

Inflation reports

Speeches

Minutes of monetary policy meetings

Policy rates

Signalling - Policy rate and 3 month treasury bills

Procent

Source: The Riksbank

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

97 98 99 00 01 02 03 04 05 061.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.03 month treasury billRepo rate

Summary The Riksbank is an authority under the

Riksdag Reasonably low inflation is beneficial

(target of 2% +-1%) Repo rate change achieves full impact

after 1-2 years Independent from 1999 Openness => a tool that creates

legitimacy

Monetary policy

implementation

The overnight marketIn both examples Bank A and B have two possibilities. 1) They can use the overnight market or2) They can use the standing facilities offered by the Riksbank

Bank A+ 50

Bank B- 50

The Riksbank

1,25

2,75

O/n interest rate

The position of the banking system0

Example 1

Bank A-+100

Bank B- 50

Example 2

The Riksbank

1,25

2,75

O/n interest rate

The position of the banking system0

Carrying out the main refinancing operation Calculating the net position of the banking

system Banknotes and coins in circulation +Deposit facility +Other liabilities +Capital ./.Gold and foreign exchange reserve ./.Marginal lending facility ./.Other assets =Net position of the banking system, i.e. the

level of the repooperation or issuing of certificates

Schedule for the main refinancing operation

The Riksbank announces a monetary policy repo or REPOcertificate at 9.30 a.m.

The Riksbank buys The banks tender securities and their bids at 9.45 a.m. transfers funds to the The Riksbank sells at the latest banks (the banks securities and

borrow from the receives the funds The Riksbank Riksbank) plus interest (the announces the allot- banks pay back theirment at 10.00 a.m. loans)

Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday

CERTIFICATES The certificates The Riksbank issues mature (the Riksbank certificates (the pays back the loan Riksbank borrows plus interest)from the banks)

The Riksbank steering of the O/N Rate

The position of the banking system, i.e the need for the banks to deposit

at or borrow from the Riksbank

Over Night Interest Rate, %

0Liquidity surplus Liquidity deficit

Repo Rate (2.00) and O/N Rate are within the corridor

Deposit Facility (Floor)

Lending Facility (ceiling)(2.75%)

(1.25%)

Fine tuning Operations +/- 10 bp

The Riksbank is carrying out a repo transaction and the liquidity need of the banking system is placed close to zero

Changes in the yield curve when the policy rate is altered

Maturity

Interest rate (%)

O/n 3 months 2 years 10 years

2

3

4

1,50

Before lowering

After lowering

B

A

To sum up The banking system has always the

possibility to deposit or borrow over night at predefined interest rates, thus the overnight interest rate will be between these two interest rates.

In order to stabilise the short term interest rate we carry out different monetary policy operations, above all a weekly repo operation and daily fine tuning.

Simplified balance sheets

The Central bank

The rest of the world

Assets Liabilities

Bonds in foreign currency 80 Notes and coins 100Refinancing operations 20 RB certificates 0Marginal lending facility 0 Deposit facility 0

100 100

Notes and coins 100 Bonds in foreign currency 80RB certificates 0 Refinancing operations 20Deposit facility 0 Marginal lending facility 0Bonds (in SEK) 1000 Bonds (in SEK) 1000

1100 1100

Assets Liabilities

RB:s balance sheet (Apr 06)

Assets Liabilities

Gold 24 176 Bank notes and coins 104 574 Net Claims in foreign currency 158 837 Deposit facility 45 Main refinancing operations 3 600 Fine tuning operations 642 Fine-tuning operations - Revaluation accounts 20 191 Marginal ledning facility 2 Other liabilities 8 000 Other assets 3 650 Capital and reserves 56 813

190 265 190 265

RB:s balance sheet with reserve requirement

Assets Liabilities

Gold 24 176 Bank notes and coins 104 574 Net Claims in foreign currency 158 837 Deposit facility 45 Main refinancing operations 13 600 Fine tuning operations 642 Fine-tuning operations - Reserve requirement 10 000 Marginal ledning facility 2 Revaluation accounts 20 191 Other assets 3 650 Other liabilities 8 000

Capital and reserves 56 813

200 265 200 265