stefan ingves : monetary policy in an uncertain economic policy landscape speech by mr stefan ingves, governor of the sveriges riksbank and chairman of the basel committee on banking supervision, at the west sweden chamber of commerce, goteborg, 14 october 2014. * * * accompanying slides can be found on the sveriges riksbank ’ s website : http : / / www. riksbank. se / en / press - andpublished / speeches / 2014 / ingves - monetary - policy - in - an - uncertain - economic - policy - landscape. continued low repo rate so growth and inflation can rise at the beginning of september, we members of the executive board of the riksbank decided to allow the repo rate to remain at 0. 25 per cent so that the currently low inflation will rise towards our target of 2 per cent. the low inflation we have today reflects the weak developments in economic activity both in sweden and abroad. in this weak economic situation, companies have found it difficult to pass on their increased costs to higher consumer prices. however, as economic activity strengthens and demand rises, companies will have greater opportunity to raise their prices, which will contribute to higher inflation. we are expecting this to happen as economic activity abroad strengthens in the coming years. however, the world is somewhat out of step. while the signals from the united states are strong, developments in the euro area are surrounded by storm clouds, which can be seen in confidence indicators such as the purchasing managers ’ index for the manufacturing industry. the subdued confidence in the euro area is probably because uncertainty over what direction events will take is unusually great. this is partly because of the conflict in ukraine and the remaining questions regarding european banks ’ balance sheets. the public finance situation is not entirely clear in all of the countries either. but once this uncertainty has calmed, developments in the euro area may also pick up, as we are expecting that monetary policy will remain very expansionary, fiscal policy will ease and credit granting will function better. the currently weak development in the euro area is of course also leaving its mark on the swedish economy. the development of exports is weak, which is in turn holding back investment. exports will not pick up again until economic activity abroad strengthens and it may take a year or so before export growth returns to a normal rate. but then investment is also likely to pick up as interest rates are low and the funding opportunities are good. demand from our most important trading

– which occurred in november 2008 and which is scheduled to expire at the end of this year – has made deposits more attractive and more heavily utilized. bis central bankers ’ speeches it now seems clear that the tail risk associated with many shadow - banking instruments was not understood by many market actors, including both sellers and buyers. an important contributing factor on the buyers ’ side that helped set the stage for the 2007 – 2008 financial crisis was the widespread acceptance that risk - free assets could be created by augmenting what was already thought to be a low - risk asset with a promise from a large financial institution to provide liquidity or bear credit losses in the unlikely event that such support might be needed. when, in stressed conditions, the credibility of the promise came into question, the susceptibility to runs increased dramatically. in some cases, there were explicit contractual provisions for liquidity support or credit enhancements, such as were provided to abcp vehicles by their sponsoring banks. in other cases, the support was more implicit, and was conveyed in the marketing of the assets or through an historical pattern of providing support. forms of implicit credit support were present in a variety of important funding channels and, to a considerable degree, persist today. three examples are money market funds, the triparty repo market, and securities lending. money market funds aim to maintain a stable net asset value of one dollar per share and to meet redemption requests upon demand. as such they are the very model of a nonbank “ deposit ” or cash equivalent. 2 unlike other mutual funds, money market funds are allowed to round their net asset values to one dollar per share so long as the underlying value of each share remains within one - half cent of a dollar. but a drop in the unrounded net asset value of more than one - half of one percent causes a money fund to “ break the buck ”, a scenario in which losses, at least in theory, would be passed along to the fund ’ s investors. however, fund sponsors historically have absorbed losses whenever necessary to prevent funds from breaking the buck, with only two exceptions. even though they had no legal obligation to do so, sponsors voluntarily supported their funds more than 100 times between 1989 and 2003, presumably because allowing a fund to break the buck would have damaged the sponsor ’ s reputation and franchise. this tendency was well understood by investors. indeed, a standard reference book on money markets states that a “ money fund run by an entity with deep pockets,