Complementary monetary policy measures

The Riksbank conducts monetary policy mainly by using decisions on the repo rate to steer the market rate with the shortest maturity, the overnight rate. This is the interest rate on loans between the banks, from one day to the next. The overnight rate in turn affects other market rates, including the rates paid and received by households and companies. The views of various agents on future monetary policy also affect the levels of these interest rates. The Riksbank's aim is for monetary policy to be predictable and it therefore publishes regular forecasts for the repo rate.

But the Riksbank can affect the general level of interest rates in the economy in more ways. The Riksbank can choose to use such monetary policy measures as a complement to decisions on the repo rate, especially when the repo rate is already very low or even below zero. If the Riksbank then wants to lower 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.

There are also other complementary measures that the Riksbank could use, including purchases of other types of security, loans at longer maturities to banks, lending to companies or interventions on the foreign exchange market. 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.

Updated 20/01/2018