irma rosenberg : the property market, the economic situation and monetary policy speech by ms irma rosenberg, deputy governor of the sveriges riksbank, at a seminar on the property and rental market, karlstad, 11 november 2005. picture to this speech can be found on the sveriges riksbank website, www. riksbank. com. * * * thank you for your invitation to come to karlstad and participate in this seminar on the property and rental market. to begin with, i intend to speak about the property market and why it is important for us at the riksbank to monitor how it is developing. then i will discuss the economic situation internationally and in sweden and give my view on inflation prospects and monetary policy. the property market developments in the property market are important both in view of the riksbank's function to promote financial stability and of the monetary policy objective to maintain price stability. on account of that we regularly monitor the situation in both the commercial property market and the housing market. that the property market is significant for the riksbank ’ s stability analysis is due to the clear linkages that exist with the financial sector. the most important is that property companies are major borrowers from the banks. moreover, a large proportion of bank lending is secured on commercial and residential property. so if problems were to arise in the property market, they could spill over to the financial sector. one example of when this happened was during the banking crisis at the start of the 1990s. during the years 1992 - 93, fully 40 per cent of the banks ’ loan losses stemmed from the commercial property market. let me begin by discussing how i view the developments in the commercial property market and then move on to the analysis of the housing market. because the two markets have shown completely different developments in recent years. the commercial property market the equity market decline in 2000 was accompanied by a weakening in demand for office premises, and rents and prices for commercial property began to fall as the number of vacancies rose. in recent years, turnover of properties has risen again. presently, the drop in prices seems to have decreased and in some regions prices have even risen. even though it is difficult to determine whether there has been a definite turnaround yet in the price developments for commercial property, such a turnaround can be expected to come when demand for labour recovers more clearly. vacancy levels are still high, though, which means that rents have not yet risen more generally

for economy policy to manage. this is a risk scenario that the riksbank ’ s executive board has devoted some attention to in recent years. it is also a risk that individual households have reason to take into account when they are about to take on new loans. so these mechanisms are something that we have to take into account when we make our monetary policy decisions. the current economic situation international economic activity still firm international economic growth was high last year. in the latest inflation report in october, we noted that the slowdown in international economic activity earlier this year appeared to have been temporary. the oil price had turned out considerably higher than we previously expected, however, prompting us to sharply revise up our oil price forecast. this was expected to contribute to an increase see financial stability report 2005 : 1. inflation report 2005 : 3, page 43. 3 / 6 in international price pressures and to a slight moderation of growth. these effects were forecast to be relatively limited, however. the picture of relatively firm economic growth abroad in the coming years was thus broadly unchanged. consequently, swedish export markets also were estimated to grow at a firm pace in the next few years. in the us, the hurricanes and oil price increases in recent months have contributed to dampening the economy somewhat. the us federal reserve estimates that the rate of increase in industrial production has been held back a couple of percentage points in august and september overall. however, preliminary national accounts data for the third quarter point to continued firm growth. households and companies have continued to boost their consumption and investment at a fairly stable rate. the purchasing managers index for both the manufacturing sector and the services sectors in october indicate relatively firm developments at the beginning of the fourth quarter as well. elsewhere in the world, too, there have been a number of positive economic signals. in october, the purchasing managers index rose in several european countries and in japan. the german ifo index also showed a positive trend in october. in the uk, however, the recent economic slowdown has continued, as shown, among other things, by preliminary gdp data for the third quarter. inflation abroad has turned out somewhat higher recently than we anticipated in the latest inflation report. in the us, inflation rose sharply in september, to almost five per cent. excluding energy prices, though, it is still at roughly two per cent. the us federal reserve again raised the federal funds rate at its latest monetary policy meeting, bringing it up to 4 per cent, i. e. 3 percentage