What is monetary policy?

The aim of monetary policy is to ensure that money retains its value over time, something central banks normally try to achieve by influencing the cost and availability of money in the economy. The Riksbank’s monetary policy aims to keep inflation low and stable. In this way, the Riksbank contributes to favourable economic development in Sweden. The decisions concerning monetary policy are taken by the six members of the Riksbank’s Executive Board.

According to the Sveriges Riksbank Act, the objective for monetary policy is to maintain price stability. The Riksbank has interpreted the objective to mean a low, stable rate of inflation. More precisely: to keep inflation measured in terms of the consumer price index with a fixed interest rate, the CPIF, around 2 per cent per year. Even though the inflation target is the overriding objective, monetary policy also supports general economic policy objectives with a view to achieving sustainable growth and high employment.

The Riksbank's main monetary policy tool is the repo rate. In some situations, the repo rate may need to be supplemented with other measures to ensure that monetary policy has an effective impact. At the monetary policy meetings, the Executive Board takes decisions on the repo rate and makes an assessment of the repo rate path needed and any other complementary measures that may need to be implemented.

Time lag in monetary policy

It takes time before monetary policy has a full effect on the economy at large and on inflation. Monetary policy is therefore guided by forecasts of economic developments. The Riksbank includes an assessment of the future path for the repo rate among its forecasts.

Monetary policy and financial stability are linked

The Riksbank is also responsible for financial stability. A stable financial system is a prerequisite for the Riksbank to be able to conduct an effective monetary policy. This is because the financial markets and the way they function affect the impact that monetary policy has on the interest rates that households and companies pay on their loans. Moreover, the economic consequences of a financial crisis would directly affect price stability, growth and employment.

Updated 20/01/2018