Views on the Riksbank’s monetary policy communication, March 31, 2008

Per Lindkvist

Chairman of the Swedish Securities Dealers Association’s Board of Money Market and Bond Trading

-Deputy General Manager, Danske Markets Sweden

The Board of Money Market and Bond Trading

Current members - trading department representatives from:

ABN AMRO Danske Bank Handelsbanken SEB Swedbank Nordea Öhman Fondkommission

The Swedish Money and Bond Market

Common interest to have a well functioning market place The monetary policy transmission mechanism moves through market rates Sweden has a market maker driven market that has worked very well with

high liquidity over time Sweden is in comparison to other markets and monetary policy areas

small – but with active domestic as well as international investors Liquidity important to reduce SNDO and other issuers lending costs Institutional investors need for risk adjustments and low transaction costs

depends on bid/offer spreads and market turnover Market functionality is important for the whole Swedish society - directly

or indirectly

General market situation and Monetary Policy

Since summer 2007 - global market distress with lower liquidity and higher volatility in general

In this environment, it is of most importance that Monetary Policy is characterized as transparent and predictable

Communication is crucial in order to make the market functionality efficient Frequency between meetings is approximately 2 months – the clock does

not stop in between and the pricing process is continuous

Feb 13, 2008 publication of policy decision - an example

Monetary Policy – publication Feb 13, 2008

100% in analyst poll expected policy decision to be on hold

Market prices - very high probability of unchanged repo rate

Escalated credit crisis, US economy downfall, massive Federal Reserve cuts, general decline in global economy considered important by market

Why did prices move more than necessary?

Obviously, the market did not interpret the Riksbank’s intentions correctly Nor did the Riksbank’s board members signal that the market was mispriced

strongly enough Specifically, the market underestimated the analytical importance attached

to the rise in inflation expectations by the Riksbank’s board

Some additional communication might have created the following situation Uncertainty was expected regarding votes e.g. 2-4, 3-3 or the actual 4-2

among market participants A rational market would expect something between 0 and 25 bp e.g. 12.5 bp Prices would have been adjusted by 12.5 bp in the shortest maturities and

much less than +/- 12.5 bp for longer maturities the day of publication compared to the actual >+20 bp parallel shift up to 2 years.

Announcements of policy decisions and volatility

Moving forward:

The market maker community would like to see more communication between meetings

In times of distressed markets and rapid changes, the need for communication between meetings increases

A proposal is that individual board members should express their view on relevant new information as well as what type of factors they regard as important for their thinking – this should not be expressed nor interpreted as pre commitments in relation to near term policy decisions

Irma Rosenberg’s latest speech when she did address development after the latest policy meeting is a definitely a step in the right direction – hopefully a start of an adjusted praxis within the current information policy!