One indication that the low inflation is a global phenomenon is that most central banks with inflation targets experienced inflation undershooting the target last year (see Figure 4). However, inflation abroad is not the only explanation for the low inflation in Sweden. The exchange rate is significant for how prices abroad are “translated” into prices for Swedish import goods. During the financial crisis in autumn 2008, the krona depreciated substantially, but after that there was a fairly long period with a clear appreciation, which contributed to pushing down import prices in Sweden. But over the past year the trend has levelled off, and the krona has even weakened slightly so far this year (see Figure 5). The development of the krona is therefore probably mainly a partial explanation for the earlier low inflation, and is less so now. A further explanation for the low inflation in Sweden is that the uncertain economic climate in the wake of the European debt crisis has meant that companies have not been able to pass on cost increases to consumer prices in the same way as before. Moreover, their margins have been squeezed by the stiff competition.2 This picture is confirmed by the preliminary results of the survey we made together with the National Institute of Economic Research, where we asked 1,500 companies in mainly the services, retail and construction industries what factors have significance for their pricing.3 But inflation in Sweden has repeatedly been lower than both the Riksbank and market analysts have expected (see Figure 6).

The development of household debt is linked to the development of housing prices, which is not so strange as housing purchases as largely financed through loans (see Figure 7). A high level of indebtedness makes households more vulnerable to various shocks. Ultimately, shocks in, for instance, incomes, housing prices or interest rates can trigger adjustments that have fairly significant effects on the macro economy: weak demand, high unemployment and difficulties stabilising inflation around the target. Naturally, we wish to avoid this type of development. There has recently been a debate on whether giving consideration to financial imbalances in the repo-rate decisions is compatible with the Riksbank’s monetary policy assignment. I consider it to be entirely compatible with the monetary policy assignment, as financial imbalances ultimately risk jeopardising both real economic stability and inflation stability. In a really negative scenario, financial imbalances may not only lead to unfavourable macroeconomic outcomes, they may also pose risks to financial stability.5 Financial stability is an important condition for monetary policy to function smoothly. The monetary policy transmission mechanism and the possibility to attain the monetary policy objectives – price stability and real economic stability – deteriorate substantially if a financial crisis breaks out. The monetary policy decisions taken in recent years have thus involved a balance between stabilising inflation in the shorter term and also taking into consideration the effects the repo rate has on household indebtedness and thus the risk of an unfavourable scenario later on. Figure 8 is a way of illustrating this balance within monetary policy.