stefan ingves : introduction on monetary policy speech by mr stefan ingves, governor of the sveriges riksbank, at the riksdag committee on finance, stockholm, 22 february 2007. * * * thank you for the invitation to come here! i came here for the first time one year ago, as newlyappointed governor of the riksbank. a year passes quickly, and now it is once again time for me to summarise the past year and at the same time report on how the executive board of the riksbank views the prospects for the economy and inflation. before i begin, i would like to welcome the fact that the committee has decided to hold this hearing at a later date in relation to the publication of the riksbank's report. of course, this means i risk having to answer even sharper questions than usual, but it ’ s all in the line of duty. it is also important that these hearings are held under the best possible conditions. my most important message today is : • we have now begun to publish our own forecast for the repo rate. this means that we have taken a further step towards increased clarity and openness in monetary policy. • inflation rose last year, but was still below the target. one of the main reasons is the substantial productivity growth. understanding which mechanisms lie behind the strong productivity has been, and is, an important task for the riksbank. • the economic prospects are bright. economic activity is strong and resource utilisation is increasing. given this, we raised the repo rate by 0. 25 percentage points last week. • our assessment is that the repo rate needs to be raised by a further 0. 25 percentage points over the coming six months. after that we can probably pause a while before it is time for another increase. changes in the riksbank ’ s forecasting methods let me begin by saying something about a couple of new elements we have introduced in connection with the latest forecasting work. as you have probably already noticed, one change is that we are now for the first time basing our forecasts for inflation and the real economy on our own assessment of what constitutes a reasonable future development of the repo rate. previously, we based our forecasts on the assumption that the repo rate would develop in line with the expectations that could be read from the interest rates in the financial markets. prior to this, our forecasts were based on the assumption

to continue to live with some surprises in the economy. this applies in particular when structural changes in the economy change the historical pattern. but improving understanding of what has happened is still important. the cause behind fluctuations in inflation and growth is important for how monetary policy should be designed. the high productivity growth has meant that the riksbank has been able to conduct an expansionary monetary policy. in other words, the economy has managed a high growth rate without prices rising much. under these circumstances a natural question might be whether we should have cut the rate more in order to push up inflation towards the target more quickly? with hindsight it is fairly easy to note that we could possibly have made the interest rate cuts at a slightly faster pace when we began making cuts a few years ago. we have already noted this in various contexts and it is hardly controversial. on the other hand, i do not believe that it would have been wise to cut the rate much more in recent years. in 2005 the interest rate had fallen to a historically low level of 1. 5 per cent. although the riksbank predicted in 2005 that inflation would remain low in 2006, albeit rising slightly, we were counting on strong growth in demand, partly due to the expansionary monetary policy. the low interest rates had also led to a rapid rise in household borrowing and house prices. if we had tried in that situation to push up inflation more quickly by means of further interest rat cuts, i believe there was a risk that the economy would have overheated later on, with excessively high price and wage increases and other imbalances. in that case we would have been forced to tighten monetary policy much more than we now envisage. ultimately, we would have risked an unstable economic development. monetary policy ’ s ability to stabilise the economy let me also briefly mention in this context the question of monetary policy ’ s ability to stabilise the economy in general. by considering how quickly we should aim to bring inflation back on target, we try to contribute to the most stable development of production and employment possible. but the fact that we give consideration to the real economy when formulating monetary policy does not mean that we have any targets for employment or production. there are several reasons for this. firstly, it could probably easily lead to unrealistic expectations of what we can achieve by raising and cutting the interest rate. monetary policy cannot in the long run affect either production or employment. well - judged adjustments in the interest