Complementary monetary policy measures
The Riksbank conducts monetary policy mainly by changing the policy rate. However, the Riksbank can influence interest rates in the economy as a whole in more ways, for example by purchasing or selling government bonds in the secondary market. In times of financial turmoil or crisis, the Riksbank can also for monetary policy purposes provide liquidity to the financial system to ensure that it functions properly and that monetary policy has the desired effect.
Sometimes the Riksbank may need to supplement decisions on the policy rate with other monetary policy measures, especially when the policy rate is already very low or even negative. If the Riksbank then wants to cut the level of interest rates further to stimulate the economy, it can do so by, for example, buying government bonds on the secondary market. The Riksbank then pays for the bonds by increasing the amount of liquid funds in the economy. One effect of the Riksbank’s purchases of government bonds is that the prices of these securities will be higher than they otherwise would have been, which pushes down government bond yields. Through various channels, these low government bond yields spread to other interest rates in the economy. If the Riksbank needs to raise interest rates later on, a higher policy rate can be complemented by, for example, sales of government bonds in the secondary market so that holdings decrease at a faster rate than if the bonds were held until maturity. More information on the Riksbank’s purchases and sales of government bonds. There are also other complementary measures that the Riksbank could use, including purchases of other types of securities and interventions on the foreign exchange market.
In times of turmoil and great uncertainty, liquidity in the financial markets often deteriorates. This means that it become more difficult and more expensive to obtain funding for those who need it. The reason for this is that the agents offering funding feel that the risks have increased and therefore demand more payment or hesitate to offer funding. When the financial markets are not functioning properly, monetary policy is not as effective either. For monetary policy purposes, the Riksbank can therefore provide liquidity to the financial system by offering financial agents general liquidity measures. This can be done by the Riksbank offering credits, entering into repurchase agreements or purchasing and selling financial instruments.
The Riksbank can take corresponding general liquidity measures to counter severe shocks in the financial system in Sweden (for financial stability purposes). Read more on the page Managing a financial crisis.
The choice of measure will depend on the circumstances and what effect the Riksbank deems that a certain measure will have on the economy. An important aim of complementary monetary policy measures is to signal that the Riksbank is taking sufficient measures to achieve the inflation target and thereby maintain confidence in the target. Read more about complementary monetary policy measures on the page Monetary policy instruments and its subpages.
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