Sveriges Riksbank A R The objective of the Riksbank is to maintain price stability besides promoting a safe and efficient payment system The Riksbank thereby contributes to sustainable growth and increased employment in brief ■ Governing Board appointed by the newly elected Riksdag on October. C ■ New Riksbank legislation approved by the Riksdag on November. ■ 1998 IN BRIEF 1 ■ New Governing Council, as of , appointed by the Riksdag on December. ■ THE RIKSBANK’S OBJECTIVE 2 ■ The six members of the new Executive Board, as of , appointed by the Governing Council ■ GOVERNOR’S STATEMENT 3 on December. ■ EXCHANGE RATE SYSTEMS ■ The Riksbank decides on June to lower the repo rate from . to . per cent. IN THE 20TH CENTURY 4 ■ The Riksbank decides on November to lower the repo rate from . to . per cent. ■ MANAGERIAL STATEMENTS 5 ■ The Riksbank decides on November to lower its borrowing and lending rates, in each case by . percentage points, to . and . per cent. ■ MONETARY POLICY 6 ■ The Riksbank decides on November to lower the repo rate from . to . per cent. ■ THE FINANCIAL SYSTEM 12 ■ The Riksbank decides on December to lower the repo rate from . to . per cent. ■ INTERNATIONAL COOPERATION 15 ■ GOVERNING COUNCIL 20 ■ The Riksbank signs the ERM Agreement in September; the krona is not participating. ■ EXECUTIVE BOARD 21 ■ The Riksbank participates in IMF support, totalling about USD . billion, for Brazil. ■ OVERVIEW OF DEPARTMENTS 22 ■ The Riksbank, together with the Financial Supervisory Authority and financial firms, forms a joint council for the coordination of general measures for the Year transition. ■ THE YEAR 2000 QUESTION 28 ■ More than two persons out of three in Sweden support the Riksbank’s per cent inflation target. ■ CASH HANDLING AND ITS MANAGEMENT IN 2002 29 ■ Seven old banknotes demonetised at the turn of . ■ HUMAN CAPITAL & THE ENVIRONMENT 30 ■ Four Inflation Reports and two Financial Market Reports published during the year. ■ ANNUAL ACCOUNTS 32 ■ COMMENTS ON THE ACCOUNTS 32 ■ ACCOUNTING PRINCIPLES 33 Selected statistics 1998 1997 1996 Year-end figures: ■ BALANCE SHEET 34 Repo rate (per cent) 3.40 4.35 4.10 ■ PROFIT AND LOSS ACCOUNT 35 Money rate (three-month, per cent) 3.43 4.52 3.62 ■ NOTES TO THE ACCOUNTS 36 Bond rate (ten-year, per cent) 4.18 5.98 6.71 Exchange rate (TCW) 130.60 121.51 117.83 ■ PROPOSED ALLOCATION SEK/DEM 4.8512 4.4185 4.4325 OF NET REVENUE FOR 1998; SEK/USD 8.1320 7.9082 6.8859 FIVE-YEAR OVERVIEW 40 Annual figures: ■ NOBEL MEMORIAL GDP growth (per cent) 2.9 1.5 1.3 PRIZE IN ECONOMIC SCIENCES 42 Unemployment (per cent) 6.5 8.0 8.1 CPI change (per cent) 0.4 0.9 0.8 ■ PUBLIC INFORMATION 43 Balance on current account (SEK billion) 38 51 44 ■ CALENDAR 44 Balance of trade (SEK billion) 140 141 125 Government borrowing requirement (SEK billion) –10 * 0 21 * Preliminary figure. SVERIGES RIKSBANK 1998 T R’ The Riksbank’s objective is price stability The Riksbank is the Swedish central bank At its first meeting, in the beginning tral bank that is free to formulate monetary and is accountable for monetary policy. , the Executive Board decided that the policy so that this objective is fulfilled. The objective of the Riksbank’s oper- current formulation of the monetary policy A framework for monetary policy, con- ations is to maintain price stability. target continues to apply. Monetary policy sisting of a central bank with a demarcated Monetary policy’s principal instrument will go on aiming at keeping the change in independence to fulfil a price stability ob- for maintaining price stability is the repo rate the consumer price index at per cent with jective under democratic control, has been – the rate for bank financing in the Riksbank. a tolerance interval of ± percentage point. the foundation for central bank reforms in The Riksbank adjusts the repo rate to influ- There is reason, however, to clarify the for- several other countries. This approach also ence the level of economic activity and hence mation of monetary policy. lay behind the construction of the institu- in time the development of prices. Monetary policy normally aims at ful- tional framework for the European Central The Riksbank is also required to pro- filling the per cent target in twelve to Bank (ECB) as expressed in the Maastricht mote a safe and efficient payment system. twenty-four months time. There are two Treaty and in the statutes of the European The Riksbank fulfils this objective by grounds for departing from this rule. One is System of Central Banks (ESCB) and the supplying currency in the form of notes that in the relevant time perspective the ECB. and coins, holding credit balance on ac- consumer price index may be pushed up- counts, providing a basic infrastructure in wards or downwards by one or more factors the form of systems for the distribution of that are not considered to affect inflation cash, the RIX system and so on, and carry- more permanently. Changes in interest ex- ing responsibility for the oversight of pay- penditure, indirect taxes and subsidies are ment transactions. examples of such factors. The other reason Moreover, without prejudice to the ob- is that a quick return to the target in the jective of price stability, the Riksbank is to event of a sizeable deviation can sometimes support general economic policy with a be costly for the real economy. If either of view to achieving sustainable growth and these situations occurs, the magnitude of high employment. the deviation from the target, defined in terms of the CPI, that may be motivated I one to two years ahead will be clarified by the Riksbank in advance. Since the beginning of the Riksbank Such a clarification facilitates an ap- has conducted monetary policy with an in- praisal of monetary policy’s performance. flation target formulated by the Governing The new legislation closely corres- Board. Inflation is to be held to an annual ponds to economic policy’s grounds for a rate of per cent, with a tolerance interval more independent central bank. A price of ± percentage point. stability objective is liable to carry little weight if people are not convinced it will be P observed. Giving the objective an institu- tional foundation in various ways can On November the Riksdag (Swe- strengthen its credibility and thereby im- den’s parliament) passed legislative amend- prove the effectiveness of monetary policy. ments with the aim of strengthening the in- One way of providing such an institutional dependence of the Riksbank. The new le- foundation is to give monetary policy the gislation applies from January . The statutory function of fulfilling the price sta- most important component is the statutory bility objective and delegating the conduct objective for monetary policy. of monetary policy to an independent cen- SVERIGES RIKSBANK 1998 G’ A turbulent year in financial markets During the unrest in international finan- instability in Sweden’s banking system dur- cial markets that had started the year before in ing the year. The direct exposures of Swed- Asia became more pronounced. The inter- ish banks were small, both to the emerging national crisis prompted a successive down- markets and to counterparties with high ward revision of international economic levels of risk. This is probably an effect of prospects and also affected the outlook for eco- the bank crisis in Sweden in the early nomic growth in Sweden. However, notwith- s – the banks have become more pru- standing considerable problems in other parts dent and also improved their risk assess- of the world, during the year Sweden’s finan- ment capability. cial system continued to display stability. Another consequence of the Swedish bank crisis is that the authorities have inten- sified their efforts to prevent new risks from Developments during and their conse- arising. For the Riksbank this involves a con- quences for the work of the Riksbank were tinuous analysis of financial market tenden- strongly influenced by crises in international cies; the findings are presented twice a year financial markets. The turbulence in finan- in the Financial Market Report. The Finan- cial markets was markedly accentuated when cial Market Report from November the Russian government announced a debt contained an analysis of counterparty risks moratorium in the middle of August. At- in the banking system. The Report proved N tempts to limit existing losses, together with highly topical in that it was counterparty concern about additional losses, caused in- risks which lay behind the autumn’s wide- As of the Riksbank is operating under vestors to dispose of assets they perceived as spread problems in western financial mar- new legislation. The amendments can be risky and illiquid. Minor currencies, such as kets. said to have formalised the independence the Swedish krona, weakened and borrowers This analysis completed the Riksbank’s that already characterised the Riksbank’s with unfavourable credit ratings were obliged presentation of the intellectual framework ongoing work. One of the most notable to pay increasingly high interest rates. for its work of overseeing the stability of the changes is probably the altered organisation The mood among investors became still financial system as a whole. The other two that the new legislation prescribes. The more nervous in the light of the problems main components – the banking system’s Riksbank is now managed jointly by the six with the U.S. hedge fund Long Term Capital competitiveness and its credit risks on loans full-time members of the new Executive Management. There were growing fears that to households and firms – have been pre- Board, who also make the monetary policy the situation could result in a general liquid- sented in detail in earlier issues of the Finan- decisions.