irma rosenberg : the objective of monetary policy speech by ms irma rosenberg, deputy governor of the sveriges riksbank, at a meeting arranged by a – hman fondkommission, stockholm, 14 february 2006. * * * a discussion has recently taken place in the media on the objective of monetary policy. some have argued that we should have more objectives while others considered that we already work with too many objectives and that this has created a lack of clarity. in my opinion this discussion is a bit misleading. we have one objective : keeping inflation low and stable. however, in our efforts to achieve this objective, we have, like many other central banks, opted to be flexible to avoid exposing the economy to strain. our statutory objective is to maintain price stability. it has been left to the riksbank to decide on the detailed interpretation of this objective. we have defined it as meaning that inflation should be 2 per cent. however, monetary policy affects the economy with a time lag and is simply not precise enough to maintain inflation at a constant 2 per cent. the inflation target includes a tolerance interval of + / one percentage point to underline that temporary deviations are permitted, provided that these are not too large. for further clarity, we apply the principle that in the event of any deviation, inflation should normally be brought back to the target within a two - year period. when we set the interest rate, we must accordingly base our decision on an inflation forecast. in most cases, this two - year horizon provides us with the scope to return gradually to the target without having to apply monetary policy with such force as to create unnecessary fluctuations in the real economy. occasionally in the wake of a major disturbance, there may even be grounds to allow a period of more than two years to return to the target. in such cases, however, we should communicate this clearly. like most central banks with inflation targets, we apply what is usually referred to as a flexible inflation target policy. when we decided at the most recent monetary policy meeting to increase the repo rate, we once again had to take into account the continuing rapid increase in house prices and household debt. this was not because we have a target for household debt or house prices. however, it is important for us to monitor the trend in the housing market, bearing in mind both financial stability and price stability. as far as financial stability is concerned, there are no indications that house prices or household debt constitute a threat

government finances are in good condition. for several years now the public sector – unlike earlier periods of large american current account deficits – has shown a surplus in savings. all in all, there are thus many factors indicating that confidence in the american economy can quickly be recovered. if this is true, the economic decline will not last very long. the most likely situation is therefore that although the high level of indebtedness, the large deficit in savings in both the household and corporate sectors, combined with over - investment in certain sectors, will subdue growth for a time, there will be no dramatic or prolonged economic recession. however, in order to increase saving in the economy and thus correct the constant deficit on the current account, it is necessary that growth is not primarily driven by increases in consumption. net export and investment should instead be the motors behind growth to a larger extent than before. bringing about this state of affairs requires a weaker dollar exchange rate. one can therefore look with scepticism on the idea that tax cuts will bring the american economy out of its decline. how will sweden be affected? the american economy affects developments in the rest of the world through many different channels, with exports to the usa as the most direct channel and the one where the effects are easiest measured. however, exports to the usa are only responsible for a couple of per cent of gdp in sweden and have a similar significance for the euro area. spread effects via the expectations that largely govern consumption, investments and the stock market are probably much greater, although more difficult to measure. nevertheless, there are numerous indications that the swedish economy is more sensitive to developments in the usa than the economies in the euro area. for instance, shareholding is more widespread among swedish households and many of the major " swedish " multinationals – in which swedes have invested a substantial part of their shareholdings – are very dependent, directly or indirectly, on developments in the usa. developments in the swedish economy in recent years have shown many similarities to developments in the usa. rapidly rising share prices, a strong gdp growth driven by both investment and consumption and an increase in indebtedness is a description that fits both the swedish and american economies in recent years. however, the increase in economic activity began later in sweden and has not really had the same speed as that in the usa. moreover, the rise in sweden was preceded by a period where adjustments following the crisis at the beginning of the 1990s had forced down investment and consumption considerably