af Jochnick: Cautious steps towards higher interest rates

“It’s a question of taking our foot off the gas – not applying the brakes”. These were the words of First Deputy Governor of the Riksbank Kerstin af Jochnick in her speech at the Swedish Property Federation today, as she described how the Riksbank looks at monetary policy in the period ahead after the first rate rise in seven years.

Date: 28/01/2019 12:30

Speaker: Förste vice riksbankschef Kerstin af Jochnick

Place: Swedish Property Federation

The reason why we are now slowly starting to increase interest rates is that inflation has been close to target for a long time, that confidence in the inflation target has strengthened and that the high level of economic activity looks set to continue – due in part to the Riksbank's expansionary monetary policy. All this suggests that inflation will remain around the target.

The Riksbank's forecast indicates that the repo rate will rise slowly in the period ahead. Our large holdings of government bonds can also be expected to decrease in the longer term if developments turn out the way we anticipate, Ms af Jochnick continued. Our idea is for the repo rate and the repo rate path to revert to being the main monetary policy tools. Purchases of government bonds or other securities will then act as a complement when the policy rate is close to its lower bound.

Ms af Jochnick also spoke about the concern regarding high household indebtedness and the issue of how household finances and consumption will be affected when interest rates rise. The relatively small rate hikes forecast over the next three years should have rather minor effects on overall disposable household income, according to Ms af Jochnick. She stressed, however, that the aggregate figures conceal very substantial differences among groups of households and that highly indebted households will be considerably affected by higher interest rates. In a broader perspective, such highly indebted households constitute a vulnerability in the Swedish economy, as they are sensitive not only to higher interest rates but also to other types of changed economic conditions.

In conclusion, Ms af Jochnick pointed out that there are many external factors, linked to both economic activity and structural changes, that can push developments in an unexpected direction going forward. "We have not switched on any kind of auto-pilot towards higher interest rates, but are prepared to reassess monetary policy should developments require it", Ms af Jochnick emphasised.

Updated 31/01/2019