What are the primary functions of the Riksbank?
The Riksbank’s primary functions are to safeguard price stability and financial stability.
According to the Sveriges Riksbank Act (SFS 1988:1385), the goal of the Riksbank's activities is to maintain price stability. The Riksbank's interpretation of its task is that inflation, measured as the annual change in the consumer price index with a fixed interest rate, the CPIF, should be 2 per cent.
The Sveriges Riksbank Act also specifies that the Riksbank shall promote a safe and efficient payment system. Put simply, this concerns working in different ways to ensure that the financial system is stable and functions smoothly.
What is inflation?
Inflation is a rise in the general price level in the economy. Fewer goods and services can be purchased for the same amount of money - the value of money decreases.
How is inflation measured?
The most common and most well-known measure of inflation is the change in the consumer price index - the CPI. This measure is calculated and published every month by Statistics Sweden (SCB). Every month, SCB "buys" a basket of goods and services, reflecting consumption in an average household. By purchasing the same goods and services, it becomes possible to study the extent of the changes in the price of the basket. From a monetary policy point of view, one disadvantage of the CPI is that it is directly affected by changes in the policy rate. These changes have, through their impact on mortgage rates, large and direct effects on the CPI which are not connected to underlying inflationary pressures (the more lasting, or trend, inflation). The Riksbank therefore uses the CPIF, the consumer price index with a fixed interest rate, as target variable for the inflation target.
Why does the Riksbank have an inflation target?
Low and stable inflation creates positive conditions for favourable economic development in a number of ways. For example, if inflation is low and stable, uncertainty regarding future price levels is reduced. This facilitates appropriate economic decisions on the part of households and firms. Efficiency in the economy thereby increases.
How does the Riksbank attempt to attain its inflation target?
The Riksbank’s primary tool for influencing inflation – conducting monetary policy – is the repo rate. By determining the level of the repo rate, the Riksbank, via the banks and other institutes, influences the interest rates offered to households and companies when they borrow money. In this way, the Riksbank can influence activity in the economy and, ultimately, inflation. Monetary policy can also exert influence through other channels. For example, a change in interest rates can influence the rate of exchange and, thus, the prices of imported and exported products.
Is the Riksbank only concerned about the inflation target?
The Riksbank’s function is to keep inflation close to the goal of 2 per cent. If the credibility of this inflation target is unthreatened, the Riksbank can make further contributions to reducing variations in areas such as production and employment - the 'real economy’. In certain situations, a conflict can arise between stabilising inflation and stabilising the real economy. In these situations, the Riksbank can contribute to increased stability in the development of the real economy by taking slightly longer to return inflation to the target level.
On the other hand, establishing targets for production or employment is considered meaningless. Levels of production and employment are determined over the long term by the workings of the economy as a whole, and cannot be affected by monetary policy.
How does the Riksbank reason when making interest rate decisions?
Briefly, the Riksbank sets the current repo rate and prepares a forecast regarding the future repo rate so as to stabilise the forecast for inflation around the inflation target and the forecast for resource utilisation in the economy around a normal level. Resource utilisation means the manner in which the production resources of labour and capital are used. This process often requires reaching a reasonable compromise between stability in inflation and the utilisation of resources. It is important that monetary policy is continually conducted in a manner that does not compromise the credibility of the inflation target.
Why does the Riksbank publish a forecast for the repo rate?
The Riksbank naturally wishes to present its view of the repo rate – the variable that the Riksbank itself can directly determine. The publication by the Riksbank of its forecast for the repo rate can also be regarded as an expression of the Riksbank's ambitions regarding openness and clarity. Publishing forecasts and assessments facilitates the review and evaluation of the monetary policy being conducted.
Why does the Riksbank change its forecast for the repo rate?
In publishing a forecast for the repo rate, the Riksbank wishes to make it easier for the public and participants on the financial markets to understand the view the Riksbank takes of monetary policy in the near future. However, it is important to realise that this is only a forecast, rather than a promise of how the repo rate will be set in the future. Events continually occur in the economy to change the conditions for monetary policy. Consequently, the forecast for the future repo rate also changes.
How does the Riksbank make the forecasts that form the basis for the repo rate decision?
The Riksbank has a number of different tools at its disposal when making forecasts for developments in the economy. These include assessments made by experts in various areas, theories, data on historical developments and various models. All of these components are important and they complement one another.
As the economy is complex, the Riksbank uses various macroeconomic models to create a cohesive picture of the development of the economy and how any new information that becomes available should be interpreted. But models are merely simplifications of the reality. They need to be complemented by analyses and assessments made by experts with important insights into reality, which models find difficult to simulate.
What does the process leading to an interest rate decision look like?
Repo rate decisions are made by the Executive Board of the Riksbank, which consists of six individuals. These decisions are taken at monetary policy meetings. Six scheduled monetary policy meetings are held per year. Supporting documentation for the monetary policy meetings is primarily developed by officials working in close cooperation with the Executive Board. As a rule, the entire process, from the initiation of a round of forecasting to the adoption of an interest rate decision, usually takes approximately six weeks, during which time, the forecast successively takes form.