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Riksbank: Sweden’s financial system working well

Sweden's central bank has said it is following carefully the turbulence on the international financial markets triggered by problems in US sub-prime mortgages.

Published: 22 August 2007 12:42 CEST

“Our continuous monitoring of the financial markets means that we are well-informed,” said Lars E.O. Svensson, deputy governor of the Riksbank in a speech on Wednesday.

“The Swedish money market and the financial system are functioning well,” Svensson added in the speech at a meeting at Danske Bank in Stockholm.

Svensson noted that new information had been coming in since the Riksbank’s monetary policy report in June, in which it predicted higher interest rates than had previously been expected.

But he said he “not particularly interested in interpreting week by week how this information may possibly change forecasts,” according to the version of his speech published on the Riksbank’s website.

“Instead I prefer to gain an overall grasp of the new situation prior to the next monetary policy meeting in September,” he said.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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