Sweden's Approach to Monetary Policy

Article excerpt

The Sveriges Riksbank, the Swedish central bank, is an authority under the Riksdag (parliament) with responsibility for monetary policy. Its objectives are to maintain price stability and to promote a safe and efficient payment system. With the advent of the new regime, which went into effect in January 1999, the Riksdag appoints the Risksbank's Governing Council, which, in turn, appoints its Executive Board, including its Chairman, who serves as Governor of the Riksbank. A member of the Executive Board may not be a member of the Riksdag, a government minister, or an employee of the Government Office. Further, Executive Board members may not take or seek instructions with regard to monetary policy. Thus, the Executive Board has instrument, but not goal, independence.

Central Bank Assets

In the week of June 15, 2000, the Riksbank held assets of 219 billion kronor, of which 64 percent were foreign currency claims on residents outside of Sweden. These claims were mainly balances with banks and investments m securities. Gold accounted for an additional 7 percent. Lending to monetary policy counterparties denominated in Swedish kronor made up another 16 percent of the Riksbank's total assets. Main refinancing operations, or regular repo transactions, accounted for the great bulk of this entry. Assets related to fine-tuning operations were a very small fraction of total assets. The final components of Riksbank assets were securities denominated in kronor and issued by Swedish residents (11 percent, entirely government debt) and "other assets" (1 percent).

Objectives

Between 1977 and 1992, Sweden directed its monetary policy toward maintaining a unilateral exchange rate target, pegging the krona in terms of a currency basket and, later, the ecu. (1) In the currency turmoil of late 1992. however, Sweden abandoned its fixed exchange rate and adopted an explicit inflation target with no other intermediate objective. Policymakers believed that the central bank's inflation forecast actually serves as a good intermediate target and provides for efficient monitoring by the public. The Riksbank chose a 12-month inflation target of 2 percent with a tolerance band of plus or minus 1 percent, to become effective in 1995, once the impact of the krona's sharp 1992 depreciation had been absorbed. The target applies to headline CPI inflation, but the authorities have indicated that if the impacts of changes in mortgage rates, taxes, or subsidies, or of large external shocks, are deemed to be transitory, they are likely to be accommodated. If so, the expected deviation from target must b e explained in advance. (2)

Operating Procedures

The Riksbank influences the demand for money by adjusting short-term interest rates. Its ability to influence interest rates in the overnight market stems from its right to determine the terms under which it accepts deposits from and lends to banks participating in the central payments system. The policy framework encourages, but does not require, banks to achieve a zero balance in their kronor accounts with the payments system at the end of the day. The overnight rate, in turn, affects price developments in the economy via many different channels.

Standing Facilities

The Riksbank's Executive Board sets the repo rate--and, thus, the overnight deposit and lending rates--to steer monetary conditions. Since mid-1994, the Riksbank has made its overnight deposit and lending facilities available at a single unified interest rate for each facility. (3) These rates are set, respectively, 75 basis points below and above the repo rate and are currently 3.5 percent and 5.0 percent. A bank needing liquidity can use the lending facility without limit as long as it can present eligible assets as collateral. However, the gap between the interest rates for the lending facility and the deposit facility is sufficiently large that banks have an incentive to eliminate any deficit or surplus in their payments position in the overnight market. …