svante oberg : the swedish economy and monetary policy speech by mr svante oberg, deputy governor of the sveriges riksbank, at ohman fondkommission, stockholm, 30 may 2006. * * * “ on 27 april, i and my colleagues on the executive board of the riksbank decided to hold the policy rate unchanged at 2 per cent, on 11 may the minutes of the executive board ’ s monetary policy meeting were published and on 19 may we published a description of the monetary policy framework. these events provide the basis for the speech i will give today, " began mr oberg. “ at the meeting on 27 april we agreed to hold the policy rate unchanged. this decision was based on the inflation assessments presented in the riksbank ’ s inflation report in february and the new information on economic developments received since then. underlying inflation was expected to approach 2 per cent, but to be below this figure during the forecast period. the forecast is based on the assumption of gradual increases in the policy rate, ” said mr oberg. “ however, the decision to hold the interest rate unchanged was not self - evident. some of us expressed the opinion at the meeting that there was reason to consider an increase as early as april. i was one. i would like to take this opportunity to elaborate on my reasoning. this is in the light of the document we published on 19 may regarding the monetary policy framework, ” continued mr oberg. “ the riksbank conducts what is known as flexible inflation targeting. i shall here take up three aspects of flexible inflation targeting : measures of inflation, taking consideration of developments in the real economy and taking into account financial developments, ” said mr oberg. “ monetary policy is guided by various measures of underlying inflation. there is no single measure of inflation that at each point in time indicates the proper stance of monetary policy. the riksbank can choose to disregard effects that contribute to inflation deviating temporarily from the target. this occurs on a regular basis with regard to, for instance, indirect taxes and household mortgage interest expenditure, as well as supply shocks that are assessed as temporary. in practice, monetary policy today is mainly based on one measure of underlying inflation, und1x, ” observed mr oberg. “ the riksbank also takes into account developments in the real economy when making monetary policy decisions. in the preparatory works for the sveriges riksbank act, it was stated that the riks

can the ecb then do? in theory, it would then be the turn of fiscal policy. i ’ ll pass this question on to the national governments. consequently, budgetary policy must now be at the top of the agenda. it must be possible to use budgetary policy in the next cyclical downturn. the various economic policymakers must live up to their responsibilities and not simply rely on monetary policy. you were not always a supporter of the ecb ’ s current policy, especially the qe programme. why has your attitude changed? it has changed entirely in two respects. i can honestly say that the effectiveness of the programme has come as a surprise to me. if we had not started the qe programme, growth might have turned negative again. we would have had recessionary deflation in many parts of the euro area. that would have been devastating for the democracies of the euro area. i also warned about the risks that the programme could entail, but they have not materialised thus far. what we are seeing with property prices, for instance, is not a worry. the bis [ bank for international settlements ] also noted that recently. bis central bankers ’ speeches the bis referred to an uneasy calm. that ’ s why i would also say that we have to continue to monitor and follow developments. but there are no broad - based bubbles in the real estate and asset markets. and if there were? then we would have to adopt the measures and use the instruments which were necessary. but that is a national competence. the member states are responsible for financial stability. however, we have a coordination function at european level in order to prevent spillover effects and cushion external shocks. what should be done if bubbles do indeed form, a phenomenon which unfortunately cannot always be foreseen? monetary policy applies to the whole of the euro area and aims to maintain price stability. that also applies to our flexible liquidity - providing instruments. but if the bubble bursts, that ceases to work, and then more liquidity is needed again. we have standard and non - standard instruments ; both can be used. but i ’ ll say it again : financial stability is a matter for the national authorities. after all, bubbles initially occur at regional and national level. solving the problems at that level is also much more efficient. compared with national financial stability measures, monetary policy is a rather blunt weapon. now you are making the ecb ’ s monetary policy seem less important than it