The role of the Riksbank in financial markets

The Riksbank is active in both the fixed-income and foreign exchange (FX) markets, depending on the purpose. In the fixed-income market, the Riksbank lends, or allows our counterparties to deposit kronor with us, at the policy rate. The Riksbank can also buy or sell interest-bearing securities. In the event of financial market turmoil, the Riksbank can also lend foreign currency. For this to be possible, we must have assets in foreign currency, known as a foreign currency reserve. On the FX market, the Riksbank can carry out so-called FX interventions for monetary policy purposes by selling or buying kronor. The transactions that the Riksbank makes in Swedish kronor (SEK) in financial markets for monetary policy purposes and to maintain an efficient and stable financial system are usually referred to as market operations.

The Riksbank only conducts transactions with financial agents that have applied for and been approved as counterparties. 

Operational framework for the implementation of monetary policy

The Riksbank's operational framework for the implementation of monetary policy is used to steer the overnight rate towards the current level of the policy rate. The overnight rate is the interest rate that is established when different banks invest and borrow from each other overnight and it is the shortest of the so-called money market rates, i.e. the interest rates on fixed-income instruments with a maturity of up to one year. The overnight rate in turn affects other money market rates and the aim is for these to be sufficiently close to the policy rate. In this way, the Riksbank also influences market rates with longer maturities and different credit risks and thus also the interest rates faced by households and companies, and thereby the development of the economy as a whole. This is known as monetary policy transmission. When necessary, the Riksbank can also carry out transactions to influence other interest rates, such as longer government bond rates.

The operational framework has two main monetary policy instruments, standing facilities and market operations. In the standing facilities, the Riksbank offers its monetary policy counterparties the opportunity to deposit money with the Riksbank or to borrow from the Riksbank, against collateral, with an overnight maturity. Market operations can in turn consist of several different types of instrument, such as the purchase or sale of securities, the issue of Riksbank Certificates and FX transactions, to name a few. 

Read more: Operational framework for the implementation of monetary policy

Read more: How monetary policy affects inflation and the real economy through the monetary policy transmission mechanism

Management of the gold and foreign currency reserve

By owning and managing assets in foreign currency, the Riksbank can lend foreign currency to its counterparties at short notice in the event of financial turmoil. The gold and foreign currency reserve also ensures that the Riksbank can buy and sell currency for monetary policy reasons. 

The choice of foreign currencies included in the foreign currency reserve depends on which currencies, in our assessment, the Swedish banking system needs in a crisis situation. It is most important to the Riksbank that the currency reserve retains its value and that it is easy to convert the assets into liquid funds. The foreign currency reserve is therefore only invested in securities with low credit and liquidity risk, primarily government bonds issued by sovereign states with high credit ratings.

The Riksbank also has a gold reserve. The Riksbank owns gold largely due to gold’s historical link to banknotes and coins. Nowadays, however, gold is a financial asset that, like the foreign currency reserve, aims to ensure that the Riksbank can carry out its tasks.

Read more: Gold and foreign currency reserve

The Riksbank’s balance sheet

When the Riksbank carries out its policy task in practice, it often involves various types of financial transactions that in turn affect both the size and composition of the central bank's balance sheet. A common element of the monetary policy transactions and the management of the gold and foreign currency reserve is that they affect the Riksbank's assets and liabilities. The balance sheet is also affected by factors other than the Riksbank's transactions in financial markets, such as public demand for banknotes and coins.

Read more: The Riksbank’s balance sheet

Measures to safeguard financial stability

If the Riksbank needs to take measures in the form of liquidity support to safeguard financial stability, this will probably involve some form of loan in SEK or foreign currency to one or more counterparties. The Riksbank has taken such crisis measures on several occasions.

Read more: Measures in response to financial turmoil