lars nyberg : economic activity and housing finance in sweden speech by mr lars nyberg, deputy governor of sveriges riksbank, at a conference, in frankfurt am main, 4 june 2004. * * * i would like to begin by thanking you for the invitation to come here to frankfurt and introduce “ eurocatalyst investment focus : nordic covered bonds ”. i shall start with a few words about the riksbank ’ s activities. with the objective of maintaining price stability, the riksbank conducts a clear monetary policy with an inflation target of 2 per cent one to two years ahead, with a tolerance for deviations of plus / minus 1 percentage point. in addition, the riksbank has the task of promoting a safe and efficient payment system. as part of its work on carrying out these two tasks, the riksbank publishes an inflation report four times a year and a financial stability report twice a year. the most recent inflation report was published last week, while the latest financial stability report was published the day before yesterday. for those of you that are interested in economic and financial developments in sweden, i would recommend that you read both reports. economic activity everything i mention now about economic activity and the assessment of inflation is taken directly from the riksbank ’ s latest inflation report ( 2004 : 02 ), which was presented on friday, 28 may. in the report we forecast gdp growth in the oecd area to average around 3 per cent over the coming three years. with regard to the outlook for sweden, the riksbank foresees an average annual growth rate of almost 3 per cent in the coming years. looking at inflation prospects, the rate of price increases is expected to rise in the period ahead as resource utilisation increases in sweden and abroad. however, a continuation of relatively weak labour market conditions and a favourable cost situation mean that the rise in inflation is expected to be relatively moderate in sweden. our forecast in the report is for a risk - adjusted inflation rate of 1. 1 per cent one year ahead and 1. 8 per cent two years ahead, measured as und1x inflation. swedish housing finance on 1 july this year the act on issuing secured bonds ( 2003 : 1223 ) will come into force. one of the main incentives behind the new act is to offer swedish mortgage institutions the same favourable financing opportunities that these institutions face in european countries that have already introduced similar legislation. so will this new legislation result in a new financing structure

return to capital can be derived as gr = ga + ( 1 - a ) ( gl - gk ), where ga, gl and gk are the growth rates for total factor productivity, labour and capital, respectively. the relevant factor in the present context is the return to capital ( the flow of income to owners of the capital stock in relation to the value of the stock ) because this should be linked to the growth of corporate earnings. the return to that the trend rate of gdp growth has to move up from around 2 % to an annual rate of 5 % over a considerable period. thus, we are talking of a marked upward shift in the growth trend that has not yet occurred in sweden. neither has such high growth been mentioned in the united states, except perhaps for a single year. the discussion there does, however, concern the possibility that the trend or potential rate of growth has risen. that would then point to some increase in the growth of corporate earnings in the united states. why are asset prices relevant for central banks? if asset prices and the growth of credit in an economy are based on unrealistic expectations of future prospects, the result is liable to be a financial bubble. under normal circumstances, rising asset prices add to the value of collateral and thereby strengthen the borrowing propensity of investors and the lending propensity of banks. an upward trend in asset prices is therefore often accompanied by an expansion of credit. in sweden, for example, in the five - year period up to the early 1990s, real asset prices had risen more than 70 % and private sector debt relative to gdp had grown from 100 % to 150 % ( fig. 5 ). bubbles burst sooner or later, with consequences for the financial system and the economy in general that may be grave. that is one reason for central banks to take an interest in stock market trends. today, however, the situation in sweden does not resemble what happened in the second half of the 1980s. asset prices have certainly risen strongly in recent years but credit has not grown to the same extent. it seems that, at least to date in the present upswing, swedish banks and their customers have taken a different line on the provision of credit and borrowing. everyone is hopefully more accustomed to a deregulated credit market than was the case in the late 1980s. still, it is important to be alert to the future path of asset prices and credit aggregates, as well as to the underlying forces at work in the