Ingves: Monetary policy in a new environment

First of all, we must expect low interest rates to last for some considerable time to come, due mainly to global real interest rates being lower than before. This means that policy rates will also be lower, providing central banks with less scope for using interest rate cuts to tackle future recessions.

“One conclusion is that complementary monetary policy measures of the type used by many central banks in recent years, such as the purchasing of various assets, direct lending to companies via banks and foreign exchange interventions, may become more common in the future.

Secondly, households are more heavily indebted than ever before and thus are sensitive to interest rate hikes. It is therefore very difficult to say exactly what impact monetary policy will have on households and their consumption when the interest rate gradually starts to be raised, but the effects will probably be greater than in the 1990s.

Thirdly, the supply of labour has increased, which is fundamentally a positive development given Sweden’s greying population. Both the labour force and employment are on a historically high level and the expansionary monetary policy has contributed to this. But there are clear signs that the matching of job-seekers to vacancies is not working well, primarily when it comes to foreign-born persons. However, monetary policy cannot solve structural problems on the labour market. Measures within other policy areas are needed to do this. 

“Once normalisation of monetary policy gets under way, it will happen in an environment that is, in many ways, different from the one we have operated in over the last ten years. How we face up to the challenges before us will of course be a deciding factor in how bright the future will be in practice,” Mr Ingves concluded.