steering of interest rates works through the shortest interest rate in the interbank market. after this i will discuss what significance this has for the banks'credit granting. the riksbank steers the shortest market rate the fact that the central bank has a monopoly on issuing money is usually stated as a necessary condition for being able to determine price trends in its own currency - e. g. calculated by how many goods can be purchased for a particular sum of money. it is intuitively easy to understand that the amount of money in the economy is a decisive factor for the price of the goods produced in the country. in modern economies, where payments are largely made electronically, the monopoly on issuing banknotes is no longer an equally evident condition for enabling monetary policy to determine price trends. today, it is instead the right to determine the terms in the systems for large electronic payments between banks and the opportunity to influence how much the banks shall borrow or deposit in the riksbank that enable us to steer interest rates. for electronic payments to be able to function as money, it is necessary for the central bank to be perceived as guarantor for these means of payment in the same ways as with banknotes. this role can only be fulfilled by a central bank and in this way one can say that the possibility to determine price trends in the economy still lies with the monopoly on issuing money. the riksbank governs the shortest interest rate in the interbank market, so that it normally remains close to the monetary policy - steered repo rate. the fact that the riksbank can steer the interbank rate is primarily due to the fact that each individual bank participating in the system handling large interbank payments - known as the rix system - always has an opportunity to borrow and deposit money in the riksbank overnight at the lending and deposit rates set by the riksbank. these lie at 75 points above and 75 points below the repo rate respectively. the difference between the lending and deposit rates is sufficiently large for the banks normally to view it as more profitable to balance deficits and surpluses in their payments at the end of the day on the interbank market, rather than utilising the riksbank's lending and deposit facilities. both a bank with a surplus and a bank with a deficit win by depositing or borrowing in other banks at rates between the riksbank's deposit and lending rates. the fact that the interbank rate normally lies at the centre of the

eva srejber : the role of the banking system in monetary policy speech by ms eva srejber, second deputy governor of the sveriges riksbank, at fars & frosta spuarbank ab, lund, 25 september 2001. * * * firstly, i would like to begin by thanking you for the invitation to come here. today i intend to speak about the role of the banking system for the riksbank and in particular their role for monetary policy. the riksbank has been assigned by law the task of safeguarding the value of money. we also have the task of promoting a safe and efficient payment system. the banks play a central role in both of these tasks. the objective for monetary policy has been specified by the executive board as a cpi inflation rate of 2 per cent, with a deviation interval of plus / minus 1 percentage point. the instrument at our disposal for achieving the inflation target is the interest rate. of course we also have the possibility of using currency interventions as a means of achieving our objectives, but this is a monetary policy tool we would not normally use in the current monetary policy regime. i have on previous occasions discussed in general terms the mechanisms that enable a central bank to influence price trends in its own economy. here i would just like to start by very briefly running through the channels through which we assume that monetary policy takes effect. although we believe we know which channels these are, we have very little knowledge of the strength and time - scale involved. there is clear empirical evidence monetary policy does affect inflation with some time lag and with a certain efficacy, but why monetary policy has an effect is more difficult to clarify. within the riksbank's way of thinking, consumer prices are influenced primarily by the degree of resource utilisation, by import prices and by inflation expectations. monetary policy is assumed to have an effect on these factors, and thereby on inflation, through many different channels. this is known in the academic world as transmission mechanism. one usually talks of monetary policy having an effect via the interest rate channel and via the exchange rate channel. this is the traditional description of the transmission mechanism. in addition, inflation expectations probably play a prominent role in price setting. and here confidence in the ability of monetary policy to meet the price stability target is extremely important. stable, low inflation expectations should have an effect on both company pricing behaviour and wage formation. if inflation expectations are stable, the consequence may be that the degree of resource