Monetary policy instruments
The Riksbank regularly uses monetary policy instruments to implement its monetary policy in practice. The Riksbank primarily does this via what it calls its operational framework with the assistance of market operations and standing deposit and lending facilities. In addition, the Riksbank can take other measures if necessary.
Standing deposit and lending facilities
To manage the liquidity in the banking system in the short term, the Riksbank offers what are known as standing facilities over night, through which the banks can make deposits or borrow from the Riksbank against collateral.
RIX participants that are credit institutions domiciled or with a branch in Sweden and which are monetary policy counterparties have access to the standing deposit and lending facilities.
New measure on standing deposit and lending facilities
Due to the increased uncertainty on the financial markets caused by the corona pandemic, the Riksbank has decided to cut the interest rate on the lending facility. The measure is aimed at ensuring that the overnight rate on the market for Swedish kronor is close to the repo rate, as well as making it cheaper for the monetary policy counterparties to access overnight credit. The change entails:
- A cut in the interest rate on the lending facility from the repo rate +0.75 percentage points to the repo rate +0.20 percentage points. Read more in the annex to the minutes from the monetary policy meeting held on 16 March 2020.
Market operations are primarily aimed at managing liquidity in the banking system. Market operations can include everything from loans at shorter and longer maturities against collateral, repos, purchases or issues of securities, loans in foreign currency, and foreign exchange swaps. The type of market operation the Riksbank chooses to utilise depends on the needs of the financial markets and the operation’s expected effects on the economy.
Normally, when the banking system has a surplus of liquidity, market operations are aimed at reducing the liquidity in the system and, when the banking system has a deficit of liquidity, the market operations are aimed at increasing liquidity. Through these operations with short maturities (one week), the monetary policy counterparties get the opportunity to invest their surplus or borrow from the Riksbank in the event of a deficit.
Since 2008, the Swedish banking system has had a surplus. Consequently, the Riksbank issues Riksbank Certificates once a week, normally on Tuesdays, thereby reducing the liquidity in the system. The Riksbank Certificates are offered at an interest rate that is the same as the repo rate.
When necessary, the Riksbank can make monetary policy more expansionary by purchasing securities. The aim of such purchases can be both to bring down the general level of interest rates in the economy and to facilitate the credit supply in the economy. The type of security the Riksbank chooses to purchase depends on several factors such as supply and demand for various securities and the risk with which various securities are associated. For several years, the Riksbank has purchased government bonds with the aim of making monetary policy more expansionary.
To facilitate the credit supply and mitigate the downturn in the economy caused by the corona pandemic, the Riksbank has decided to adopt new measures intended, among other things, to help hold down the general level of interest rates and to conduct operations on several markets, as well as to increase liquidity in kronor and improve access to US dollars for the monetary policy counterparties. These measures include:
- Loans to the banks for onward lending to companies
- Weekly market operations at longer maturities in kronor
- Loans in US dollars
- Purchases of mortgage bonds (and other covered bonds)
- Purchases of municipal bonds
- Purchases of commercial paper
Collateral for credit
When the Riksbank supplies liquidity to the financial system, which is to say provides loans in Swedish kronor or foreign exchange, this must be carried out in such a way that it does not entail the Riksbank risking its capital. The Riksbank therefore has to take over collateral that is sufficiently adequate to prevent this happening. The Riksbank therefore places certain demands for something to be approved as collateral and decides how this collateral is to be valued. Under normal circumstances, these demands and the haircuts applied are fairly high. The terms and conditions for RIX also specify which collateral demands apply to various monetary policy instruments; read more on the page Collateral.
The banks’ access to liquidity in Swedish krona now needs to be strengthened to facilitate their funding and thereby their role as suppliers of credit to Swedish companies. One way of doing this is to increase flexibility over which collateral the banks can use when borrowing money from the Riksbank. The Riksbank has lightened the requirements for collateral and, among other measures, has now given the banks increased possibilities to use mortgage bonds (and other covered bonds) as collateral.
- The Riksbank has eased the limit regulations applied to the use of collateral and made it possible for the monetary policy counterparties to use mortgage bonds issued by the counterparties. Read more in the annex to the minutes from the monetary policy meeting held on 19 March 2020.
Conditions for Monetary Policy Instruments
The Riksbank’s various monetary policy instruments are used by the monetary policy counterparties. The conditions for the use of monetary policy instruments are described in the terms and conditions for RIX; read more on the page Conditions and instructions. The terms and conditions for RIX also specify which collateral demands apply to different instruments; read more on the page Collateral.
There are special conditions applying to some monetary policy instruments normally used by the Riksbank. Such special conditions apply to Riksbank Certificates and to the Riksbank’s purchases of government securities.
Special conditions apply to the new measures that the Riksbank has implemented/may implement; read more under each measure.