The Debate on Whether the Repo Rate Should Be Affected by the Household Debt

Abstract

According to the Sveriges Riksbank Act, the Riksbank should aim for an inflation target of 2 per cent, but at the same time foster a stable payment system. The low inflation in Sweden in the last few years has led to a situation with a tradeoff between a growing economy and the importance of financial stability. A lower repo rate would not only increase the inflation but also the household debt. Even though the effect of the household debt is predicted to by small, it cannot be neglected, especially not when house price bubbles have burst in other countries with economies close to Sweden’s. However, if the long run Philips curve is not vertical, low inflation will be costly in terms of unemployment. Other tools than the repo rate are used and new tools will be implemented to handle high household debt. For example, new regulations will be set for banks, where they have to promote a sustainable amortization even though this is not in their interests. Risk weight floors and mortgage cap are other tools that are effectively affecting the new loan takers. The macroprudental policy is about to be set up and is one step towards better understanding and analyzing of financial stability. The council will include expertise from different institutions, cooperating for the common stability goal.