Such low real interest rates would normally lead to GDP and inflation abroad being unreasonably high. If reality and models differ, it is in my opinion reality that applies. In the current abnormal times, models and historical patterns do not work so well and should to a great extent be replaced by judgement. In my opinion, the forecasts for inflation and GDP abroad under the current abnormal circumstances are compatible with the low interest rates abroad. Monetary policy alternatives in October I would thus claim that the assumption in the main scenario that policy rates abroad will be high is unrealistic, and that it is more reasonable to assume a forecast for policy rates abroad that is compatible with market expectations of interest rates abroad. This also means assuming the prevailing actual long interest rates abroad with regard to the effect on the exchange rate. Figure 9 shows monetary policy alternatives, all under the assumption of a forecast for policy rates abroad in line with market expectations, that is, a forecast for policy rates abroad that follows the grey curve in Figure 7. Figure 9a shows different interest rate paths. The red broken curve, called “Main scenario repo rate path”, is the main scenario’s repo rate path. The blue broken curve, called “Riksbank’s reaction function”, shows the repo rate path arising from the Riksbank’s historical reaction function when policy rates abroad are compatible with the prevailing market expectations. The yellow broken curve, called “Market repo rate path”, shows the prevailing market expectations for the repo rate.

Stabilising inflation stems from the objective of price stability in the Sveriges Riksbank Act. Stabilising resource utilisation stems from the emphasis in the preparatory works for the Sveriges Riksbank Act, that the Riksbank, without prejudice to the price stability target, should support the goals of general economic policy with a view to maintaining sustainable growth and a high rate of employment. House prices and household debt The arguments for raising the repo rate more than is justified by inflation and resource utilisation have emphasised developments in house prices and household indebtedness. There have also been references to potential financial imbalances building up. However, these arguments do not show what effect the repo rate is expected to have on house prices and indebtedness, or which financial imbalances are referred to. Nor is it clear what effects and risks might be involved, or how we can evaluate the effects and risks in relation to the cost of inflation and resource utilisation being too low. As household debt mostly consists of mortgages and these are used to buy housing, house prices and household debt are really two sides of the same coin. If house prices increase, then household debt increases. If we want household debt to increase more slowly, then house prices must increase more slowly. Thus, slowing down the increase in house prices and the increase in household debt is essentially the same thing. Regardless of whether or not these factors are a problem, the repo rate would appear an unsuitable instrument for influencing house prices and debts.