New deputy governor notes increasing Swedish economic dependency

Kerstin af Jochnick, who became first deputy governor at the Riksbank at the beginning of 2012, used her first public address since taking on the role to address the key factors that influence her view of monetary policy and financial stability.

One issue she immediately noted was that Sweden "has become increasingly dependent on what happens abroad".

How the debt crisis in Europe is managed therefore was, she said, "the most important factor for economic activity and monetary policy in the period ahead".

Another important factor was the links between monetary policy and financial stability, said af Jochnick. "We must be aware that imbalances and risks to financial stability can arise if interest rates remain low for too long," she said.

Of lessons to learn from the financial crisis, the first deputy governor said one of the crucial ones was the need to adopt a broader perspective on financial stability, for example placing new focus on macro-prudential policy. "The Riksbank should play a major role in the work with macroprudential policy," she said.

The first deputy governor outlined how her career to date has helped shape her view on these topics. Having previously worked for the central bank before moving to the Swedish financial regulatory body and then to various international assignments, such as working for the European Banking Authority, af Jochnick explained she had watched Sweden's dependency develop.

Af Jochnick said a "marked change" had occurred in this area since she last worked at the Riksbank. "One could also say that what I primarily bring with me from the different perspectives of my earlier working life... is this realisation of the increase in Sweden's international dependence."

Turning to monetary policy, af Jochnick said that as Sweden was a "small, open economy", it cannot be seen in isolation; the influence of other economies was a factor that must be taken into account, "not least in monetary policy", she said.

With exports making up 50% of Swedish GDP, the importance of foreign markets on the economy is clear. "The global financial crisis of 2008–2009 had a dramatic impact on us and contributed to the largest fall in GDP in Sweden since World War II," af Jochnick said.

She said the "entire global economy" was reliant on the debt crisis in Europe being managed in a "sensible" way over the next few years. "The problems in Europe must be solved so that the financial markets work effectively and the real economy grows, if global growth is to pick up again," she added.

Predicting a few years of weak growth, af Jochnick did not sugar-coat the situation. "Several countries are facing gigantic problems, partly in the form of large public debts and partly in the form of seriously weakened competitiveness," she said.

Inflation and growth prospects justified keeping the repo rate low, the first deputy governor said.

"At present, inflation is low and it is probably fairly safe to say it will continue to be low for some time," she said. Growth, however, "may not increase significantly in Sweden until next year", she added.

"Given this, my assessment was that it was necessary to cut the repo rate to 1.5% in February and to leave it at this level in April. I have also expressed my support for the repo-rate forecasts in the Monetary Policy Report and the Monetary Policy Update, which predict that the repo rate will remain unchanged in the year ahead," she said.

Af Jochnick also took the opportunity to further the Riksbank view that Basel III should not impose a maximum capital requirement for banks. "The exact capital ratios for an individual bank should be subject to national decisions," she said. "As long as the responsibility for dealing with systemically important banks lies at the national level, then the right to set the size of 'risk premiums' should also lie there."

Noting the "significant risk that the collapse of a Swedish bank would have major, negative consequences for the entire Swedish banking system and for the economy as a whole", af Jochnick said: "It is important for a central bank to manage these risks in such a way that they can never threaten financial stability."