The Riksbank s complementary monetary policy - What can a central bank do when the policy rate is close to its lower bound? Governor Stefan Ingves Swedish Centre for Business and Policy Studies/SIFR Finance panel 6 March, 2015
What can a central bank do when the policy rate is close to its lower bound? Inflation is low at present The repo rate is therefore very low Monetary policy can then be conducted in a variety of different ways The most relevant alternatives for the Riksbank: Negative repo rate Purchasing government securities Loans to companies via banks Foreign exchange interventions
Inflation is currently low in many countries Sources: National sources
Many central banks have used complementary measures 70 60 50 Bank of Japan Bank of England Federal Reserve ECB Riksbank 70 60 50 40 40 30 30 20 20 10 10 0 08 09 10 11 12 13 14 15 0 Note. Balance sheets as a share of GDP. Sources: EcoWin and national central banks
The interest rates offered to households in Sweden and the rest of the world Average Note. Lending rates from MFIs to households with housing as collateral. Sources: ECB, Mortgage Bankers Association and Statistics Sweden
Complementary monetary policy measures act through different channels Reduce the general level of interest rates Directly for longer government bond rates Via portfolio choices, also rates for higher-risk assets Increase the amount of money in the economy Increase wealth among those owning the above assets More liquidity among the banks may lead to increased lending
Monetary policy decision in February Economic activity and inflation roughly as expected But inflation risks have increased To support upturn in inflation more expansionary monetary policy Lowered repo rate and repo-rate path Purchases of government bonds Lending to companies via banks has been signalled
The yield curve before and after the interest rate decision in February Yield curve, government bonds 1,50 Government bond curve 11-feb 1,50 Government bond curve 12-feb 1,00 1,00 0,50 0,50 0,00 0,00-0,50-0,50 0 2 4 6 8 10 Note. The yield curves are interpolated zero coupon rates. Sources: Macrobond and the Riksbank
How does the Riksbank control interest rates? Banks' deposit/lending requirements at the Riksbank 400 300 Certificate, LHS Repos, LHS Fine-tuning, LHS STIBOR, RHS Repo rate, RHS 8 6 200 4 100 2 0 0-100 00 02 04 06 08 10 12 14-2 Note. Billions SEK on the left axis and per cent on the right axis. Sources: Macrobond and the Riksbank
Deposit and lending rates when the repo rate is low Sources: Statistics Sweden and the Riksbank
What effects will the purchase of government securities have? Step 1 Central bank's balance sheet Private banks' balance sheet Non-financial sector's balance sheet Governmen t securities +100 Deposits from banks +100 Deposits with CB +100 Deposits from general public +100 Government securities Deposits in banks -100 +100 Step 2 Spreads to higher-risk assets Higher general demand and inflation
Purchase of government securities affects yield curves Interest rate End rates After negative repo rate and purchase of government bonds Government securities After negative repo rate After negative repo rate and purchase of government bonds Time to maturity in years
What effects will loans to companies via the banks have? The central bank lends Central bank's balance sheet Private bank I's balance sheet Loans to the banks +100 Deposits from banks +100 Deposits with CB +100 Loans from CB +100
What effects will loans to companies via the banks have? The banks increase their lending Central bank's balance sheet Private bank I's balance sheet Company A's balance sheet Loans to the banks 100 Deposits from banks 100 Deposits with CB Loan to Company A 100 100 Loans from CB Co. A s account 100 100 Bank account 100 Bank loan 100
Loans to companies affect the yield curves Interest rate End rates Loans to companies via the banks Government securities Time to maturity in years
What effects will the purchase of foreign exchange have? Central bank's balance sheet Private banks' balance sheet Foreign government securities +100 Deposi ts from banks +100 Foreign government securities Deposits with CB -100 +100
The highly expansionary monetary policy is leading to increased risk Household debt as a percentage of disposable income, per cent Sources: Statistics Sweden and the Riksbank
If more is required, we will do more If needed to get inflation to rise towards the target Cut the repo rate and lower the repo-rate path Extend purchases of government bonds Lend to companies via banks All of this can be done rapidly on a large scale If this is not enough Foreign exchange interventions Purchases of other securities