stefan ingves : financial turbulence, monetary policy and inflation speech by mr stefan ingves, governor of the sveriges riksbank, to saco, the swedish confederation of professional associations, stockholm, 24 september 2008. * * * when storms are raging in the world around you and the course is affected, it is important to keep focus on where you are heading. take in as much information as possible and steer back towards the target in the way that provides the best journey home. in a way, this is how the riksbank tries to conduct its monetary policy. the inflation target is to provide economic stability, in particular when there is turbulence in the world around us. the original idea was that i would come here today to talk about monetary policy. and i will do so. but the international turmoil, particularly in the financial markets, has escalated in recent weeks. i would therefore like to begin first by saying a few words about this, and about the measures taken by the riksbank and others to counteract the effects of the financial crisis in the united states. the financial turbulence one can say that the riksbank is active in two main areas. one is monetary policy. the other is what is usually known as financial stability – promoting a safe and efficient payment system, as it is written in the sveriges riksbank act. to simplify, this means ensuring that payments in the swedish economy can be made securely and efficiently. for instance, the riksbank monitors and analyses the financial system, identifies potential risks and influences participants that are important to financial stability. we shall work to prevent financial crises from arising, but if they should nevertheless arise, it is our task to manage the situation. what does this mean? for instance, we must be prepared to act in situations where our assessment is that financial stability is threatened. let us assume, for example, that a swedish bank which is under the supervision of finansinspektionen, the swedish financial supervisory authority, is solvent and has assets that are greater than its liabilities, but experiences serious problems with its liquidity and thereby difficulty in meeting its payments. if the riksbank ’ s assessment in such a situation is that the stability of the financial system is at stake if the bank collapses, then we can intervene with measures to aid liquidity. the united states is currently in the midst of a financial crisis, the backwash of which is sweeping through the global financial system. although financial turbulence

a limit as to how restrictive one can be with the interest rate weapon. without the interest rate increase inflation could have soared similar to the way it did in the 1970s and 1980s. at that time the economic policy did not prevent inflation from becoming entrenched. the inflation target has been set to create conditions for good growth that is sustainable in the long term. an expansionary monetary policy which perhaps contributes to more favourable developments in economic activity in the short term can provide major problems for production and employment in the long term. the most recent decision when the most recent interest rate decision was made, we six members of the executive board held differing opinions. i and two of my colleagues voted to raise the interest rate to 4. 75 per cent. there have not been many cases where the voting is a “ draw ” and the casting vote determines the decision ; this has happened only four times since the executive board was formed almost ten years ago. the result is not particularly strange or surprising given the situation when the decision was made. we are six different individuals on the executive board. we have different backgrounds and different perspectives. sometimes this leads to our assessments differing, even if we work towards the same objective. it applies in particular to very uncertain situations like the present one. but the whole idea of having an executive board is that disagreement is permitted. different approaches and opinions enrich the discussions and hopefully lead to better decisions. my own assessment so how did i reason at the most recent meeting, when i voted for another increase of a quarter percentage point? well, to begin with it is important to put an individual decision in the right perspective. monetary policy acts with a time lag and what affects inflation a couple of years ahead is a series of interest rate decisions rather than an individual interest rate increase, or cut, for that matter. my decision in september was therefore closely connected to both the interest rate policy we have conducted over the past few years and the interest rate path i expected to see in the future. a new phase we have experienced a long period of low inflation and high growth from a global perspective, but we have now entered a new phase. in developed economies like the united states and the euro area growth is falling, while it remains high in emerging economies such as china, india and brazil. the effects of the high demand for certain commodities from rapidly - growing economies are something that central banks around the world must manage in the future. another example is the imbalances in the global economy. access