rise in housing prices, and ultimately to an increase in debt. and the conversion of rental properties to tenant - owned properties also contributes to increased debt. a further aspect is that household savings are high and have increased at the same time as debt has increased. but high indebtedness probably means that the economy will be more sensitive to shocks, even if it can be explained by fundamentals. an economic downturn could then be reinforced by households with large debts trying to increase their saving by reducing their consumption. moreover, we can hardly rule out the possibility that households ’ increased indebtedness in recent years has at least partly been caused by unrealistically low expectations of future mortgage rates. in my opinion, it is therefore in principle justified for monetary policy to now take into account the rapid increase in household indebtedness. risks with a low repo rate a further question is thus in what way monetary policy can lead to financial imbalances building up. international academic research discusses several potential problems that can arise if a central bank holds its policy rate at a low level for a long period of time. perhaps the most common problem mentioned is that investors will then seek assets with a higher yield, which also have a higher risk. one of many reasons for such behaviour could be that some portfolio managers are required to attain a minimum return on their portfolios. this behaviour risks causing an unwarranted rise in asset prices when interest rates are low. 6 there is a lively debate on this question. one important contribution to the discussion is the riksbank ’ s commission of inquiry into risks on the swedish housing market ( riksbank 2011 ). the national institute of economic research ( 2013 ) and svensson ( 2013a ) are examples of newer contributions to the debate, claiming that housing prices and household indebtedness do not comprise an evident problem. see rajan ( 2005 ). bis central bankers ’ speeches another possible problem with low interest rates is that the monetary policy stimulus can help weak companies to get along without having to deal with their problems. in this way, a necessary structural transformation in the economy may be postponed. there is also a risk that the stimulus will help the banks to struggle along with weak balance sheets, which will inhibit credit granting in the economy. 7 the problems i have just mentioned nevertheless appear less relevant to current developments in sweden. but i would like to mention two other potential problems linked to low interest rates, which i think justify the concern over the

martin floden : my view of monetary policy and household debt speech by mr martin floden, deputy governor of the sveriges riksbank, at swedbank, stockholm, 24 september 2013. * * * this is my first speech since taking up the post of deputy governor of the riksbank. since i started in the spring i have taken part in two monetary policy meetings. on both occasions i have entered a reservation against the majority decision and advocated a lower repo rate. it therefore seems natural for me to devote my speech today to explaining my view of monetary policy and the reasons for my reservations. should monetary policy take into account households ’ high and rising indebtedness? this is a question that has been central for monetary policy in recent years and also at my first monetary policy decisions. i consider it clear that the riksbank has a responsibility to safeguard financial stability and prevent crises linked to credit granting. however, it is not so clear what consequences this responsibility has with regard to conducting monetary policy in practice. i shall explain my reasoning at the recent monetary policy meetings. i also intend to comment on how the new framework for macroprudential policy may affect my view of monetary policy. however, i shall begin with a brief description of my view, and the riksbank ’ s view, of the economic situation. positive signs but risks remain in recent months we have been able to see some positive signs in the swedish economy, and also abroad. confidence has risen in both the household and corporate sectors in sweden, and there are some signs that unemployment is falling. in the euro area, gdp increased in the second quarter, after six quarters in a row of falling gdp. here, too, the confidence indicators are giving more positive signals. however, one must remember that the economies still have a long way to go to reach a normal status. gdp growth and inflation are at low levels in both sweden and the euro area. and there are still large downside risks for economic developments. in the euro area, the weak public sector finances and problems in the banks ’ balance sheets have scarcely improved in recent months. in the united states, the full effects of the sequester have not yet been realised, and there is also uncertainty over how the debt ceiling will be raised during the autumn. growth rates in large emerging markets like china and india have fallen, albeit from very high levels. previously, international capital has tended to move towards emerging markets as interest rates