14  BIS central bankers’ speeches  In summary, in this speech I have pointed out that it follows from the Sveriges Riksbank Act and the associated Government Bill that the mandate for monetary policy is price stability and highest sustainable employment. I have also explained that this means that the Riksbank shall stabilise inflation around the inflation target of 2 per cent and unemployment around a long-run sustainable rate. A lower repo rate in the last few years would have led to better target attainment for both inflation and unemployment. At the same time, financial stability and mortgage growth under current circumstances provide no reason for keeping inflation below target and unemployment above a long-run sustainable rate. Financial stability and mortgage growth can be better handled with the instruments available in macroprudential policy. It is also likely that average unemployment has been higher in the last 15 years because average inflation has undershot the target. Therefore it is important that average inflation over a longer period is kept in line with the target. References Assenmacher-Wesche, Katrin, and Stefan Gerlach (2010), “Monetary policy and financial imbalances: Facts and fiction”, Economic Policy, July 2010, 439–482. Bank of Canada (2011), “Renewal of the Inflation-Control Target: Background Information – November 2011”, www.bankofcanada.ca. Claussen, Carl Andreas, Magnus Jonsson and Björn Lagerwall (2011), “A macroeconomic analysis of housing prices in Sweden”, The Riksbank’s inquiry into the risks in the Swedish housing market, April 2011, p. 67–95. Fuhrer, Jeffrey (2011), “Inflation Expectations and the Evolution of U.S. Inflation”, Policy Brief No.

In my view, it should only be possible to neglect price stability and highest sustainable employment for a limited period if there are clear signs of problems with financial stability, if there are no means of addressing these problems without setting aside price stability and highest sustainable employment and if it can be credibly demonstrated that another, for example a higher, repo-rate path would lead to better target fulfilment for inflation and unemployment in the longer run. This last condition is important. The government bill that contained the proposal for the Sveriges Riksbank Act states namely that the policy rate may only be used to prevent a financial crisis if such a crisis threatens the price stability objective. In my opinion, there are no clear signs of problems with financial stability at present, there is no lack of means to maintain financial stability and if necessary to limit growth in mortgage  1  Sveriges Riksbank Act 1983:1385 and Government Bill 1997/98:40. BIS central bankers’ speeches  1  lending, and nor is there any theoretical or empirical support for the view that a low policy rate would lead to imbalances in Sweden. If anything, a lower policy rate might instead mean that the banks have less incentive to seek short-term funding in foreign currency and thus the risks linked to this funding will decline. If the Riksbank succeeds in stabilising inflation around the target and unemployment around a sustainable rate, average inflation should be in line with the target over a longer period of time.