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Monetary policy with an inflation
target
The world’s oldest central bank
1668Sveriges Rikes
StändersBank
1661Palmstruch -
first banknotes
1701The Riksbank
issues “transport” notes
1830sCommercial banks
are established
1904Monopoly onissuance of banknotes
1866Sveriges Riksbank
1999New legislation
makes bank independent
An authority under the Riksdag
The Riksdag
The Government Sveriges Riksbank
The Ministry of Finance
The Swedish National Debt Office
Finansinspektionen (theSwedish Financial
Supervisory Authority)
Economic policy
Economic policy
Fiscal policy Monetary policy
The Riksdag and the Government The Riksbank
The Riksbank’s governing
The Riksdag
General Council11 members
Executive Board6 members
The executive board of the Riksbank
Eva SrejberLars Heikensten Irma Rosenberg
Kristina Persson Lars NybergSvante Öberg
Stefan Ingves
The Riksbank’s tasks To safeguard the value of money (=price
stability)
- Oversee and analyse monetary stability- Conduct monetary and exchange rate policy measures - Manage the foreign exchange reserve
To promote a safe and efficient payment system - Oversee and analyse stability in the payment system- Responsibility for the RIX system- Ensure the supply of banknotes and coins
UND1X inflation and historical meanAnnual percentage change
Sources: Statistics Sweden and the Riksbank
-2
0
2
4
6
8
10
12
14
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04-2
0
2
4
6
8
10
12
14UND1XHistorical mean
1970-19927%
1993-20051.7%
Different monetary policy regimes
Source: The Riksbank
0
5
10
15
20
25
89 91 93 95 97 99 01 03 0590
100
110
120
130
140
150
160
Short term interest rate, 3-month Treasury Bill (left scale)SEK measured as TCW (right scale)
Inflation targetFixed exchange rate
An independent Riksbank
Up to 1999: Conducted monetary and exchange rate policy.
General Council 4 years
Riksbank Governor 5 years
After 1999: Price stability
General Council 4 years
Executive Board 6 years
The Riksbank’s organisation
Executive Board
Administration Department
IT Department
Internal Audit Department
General Secretariat
Monetary Policy
Department
Market Operations Department
Financial Stability
Department
InternationalSecretariat
Research
Monetary policy theoryWhy a price stability target?
Monetary policy can not affect employment in the long run
Establishing inflation expectations
High and fluctuating inflation increases uncertainty and affects investment
Costly to hold back inflation
High inflation leads to redistribution of income and wealth
One instrument – one target
Inflation expectations by money market agents
Per cent
Sources: Statistics Sweden and Prospera Research AB
-2
-1
0
1
2
3
4
5
1994 1996 1998 2000 2002 2004 2006 2008 2010-2
-1
0
1
2
3
4
5Inflation expectationsCPIJan -95
Feb -06
Nov -05
Okt -05
Mar -05
Nov -04Feb -98
Feb-97
Feb -96
May -06 Oct -06
Nov -06
Why one to two years ahead?
Uncertainty over the transmisson mechanism
Reduce fluctuations in the real economy
CPI or UND1X? …..the change in the consumer price
index as from 1995 shall be limited to 2 per cent, with a tolerance for deviations of 1 percentage point.
General Council of the Riksbank 15-01-1993
howeverexcl. transitory effects (interest expenditure and indirect
taxes)
supply shocks – longer time horizon
Executive Board of the Riksbank 04-02-1999
-1
0
1
2
3
4
97 98 99 00 01 02 03 04 05 06 07 08 09-1
0
1
2
3
4UND1X
Forecast Inflation Report 2006:3
UND1X forecast, October 2006Annual percentage change
Sources: Statistics Sweden and the Riksbank
Within 2 years
Inflation forecasts 8 monetary policy meetings per year- 4 (3) Inflation Reports- 4 updated assessments- 2 public hearings before the Riksdag
Committee on Finance
Repo rate and implicit forward rate Per cent
Source: The RiksbankNote. 15-day average.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
04 05 06 07 08 09
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0Repo rateAverage up to 12 Oct 2006
UND1X with uncertainty bandsAnnual percentage change
Sources: Statistics Sweden and the Riksbank
-1
0
1
2
3
4
5
00 01 02 03 04 05 06 07 08 09-1
0
1
2
3
4
5
Monetary policy repo Repos are implemented weekly
Term of one week Liquidity forecast in the morning Repo announcement on Tuesdays 09.30-
09.45 Allocation at 10.00 Liquidity flow on Wednesday
lending/delivery of collateral Daily fine-tuning operations at 16.20-16.40
Policy rates & deposit ratesPer cent
Source: The Riksbank
0
2
4
6
8
10
96 97 98 99 00 01 02 03 04 05 060
2
4
6
8
10Deposit rateLending rateDeposit OvernightRepo rate
Signalling – influencing expectations
Inflation reports
Speeches
Minutes of monetary policy meetings
Policy rates
Signalling - Policy rate and 3 month treasury bills
Procent
Source: The Riksbank
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
97 98 99 00 01 02 03 04 05 061.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.03 month treasury billRepo rate
Summary The Riksbank is an authority under the
Riksdag Reasonably low inflation is beneficial
(target of 2% +-1%) Repo rate change achieves full impact
after 1-2 years Independent from 1999 Openness => a tool that creates
legitimacy
Monetary policy
implementation
The overnight marketIn both examples Bank A and B have two possibilities. 1) They can use the overnight market or2) They can use the standing facilities offered by the Riksbank
Bank A+ 50
Bank B- 50
The Riksbank
1,25
2,75
O/n interest rate
The position of the banking system0
Example 1
Bank A-+100
Bank B- 50
Example 2
The Riksbank
1,25
2,75
O/n interest rate
The position of the banking system0
Carrying out the main refinancing operation Calculating the net position of the banking
system Banknotes and coins in circulation +Deposit facility +Other liabilities +Capital ./.Gold and foreign exchange reserve ./.Marginal lending facility ./.Other assets =Net position of the banking system, i.e. the
level of the repooperation or issuing of certificates
Schedule for the main refinancing operation
The Riksbank announces a monetary policy repo or REPOcertificate at 9.30 a.m.
The Riksbank buys The banks tender securities and their bids at 9.45 a.m. transfers funds to the The Riksbank sells at the latest banks (the banks securities and
borrow from the receives the funds The Riksbank Riksbank) plus interest (the announces the allot- banks pay back theirment at 10.00 a.m. loans)
Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday
CERTIFICATES The certificates The Riksbank issues mature (the Riksbank certificates (the pays back the loan Riksbank borrows plus interest)from the banks)
The Riksbank steering of the O/N Rate
The position of the banking system, i.e the need for the banks to deposit
at or borrow from the Riksbank
Over Night Interest Rate, %
0Liquidity surplus Liquidity deficit
Repo Rate (2.00) and O/N Rate are within the corridor
Deposit Facility (Floor)
Lending Facility (ceiling)(2.75%)
(1.25%)
Fine tuning Operations +/- 10 bp
The Riksbank is carrying out a repo transaction and the liquidity need of the banking system is placed close to zero
Changes in the yield curve when the policy rate is altered
Maturity
Interest rate (%)
O/n 3 months 2 years 10 years
2
3
4
1,50
Before lowering
After lowering
B
A
To sum up The banking system has always the
possibility to deposit or borrow over night at predefined interest rates, thus the overnight interest rate will be between these two interest rates.
In order to stabilise the short term interest rate we carry out different monetary policy operations, above all a weekly repo operation and daily fine tuning.
Simplified balance sheets
The Central bank
The rest of the world
Assets Liabilities
Bonds in foreign currency 80 Notes and coins 100Refinancing operations 20 RB certificates 0Marginal lending facility 0 Deposit facility 0
100 100
Notes and coins 100 Bonds in foreign currency 80RB certificates 0 Refinancing operations 20Deposit facility 0 Marginal lending facility 0Bonds (in SEK) 1000 Bonds (in SEK) 1000
1100 1100
Assets Liabilities
RB:s balance sheet (Apr 06)
Assets Liabilities
Gold 24 176 Bank notes and coins 104 574 Net Claims in foreign currency 158 837 Deposit facility 45 Main refinancing operations 3 600 Fine tuning operations 642 Fine-tuning operations - Revaluation accounts 20 191 Marginal ledning facility 2 Other liabilities 8 000 Other assets 3 650 Capital and reserves 56 813
190 265 190 265
RB:s balance sheet with reserve requirement
Assets Liabilities
Gold 24 176 Bank notes and coins 104 574 Net Claims in foreign currency 158 837 Deposit facility 45 Main refinancing operations 13 600 Fine tuning operations 642 Fine-tuning operations - Reserve requirement 10 000 Marginal ledning facility 2 Revaluation accounts 20 191 Other assets 3 650 Other liabilities 8 000
Capital and reserves 56 813
200 265 200 265