Views on the Riksbank

1
Views on the Riksbanks monetary policy
communication, March 31, 2008

• Per Lindkvist
• Chairman of the Swedish Securities Dealers
  Associations
• Board of Money Market and Bond Trading
• -
• Deputy General Manager, Danske Markets Sweden

2
The Board of Money Market and Bond Trading

• Current members - trading department
  representatives from
• ABN AMRO
• Danske Bank
• Handelsbanken
• SEB
• Swedbank
• Nordea
• Öhman Fondkommission

3
The Swedish Money and Bond Market

• Common interest to have a well functioning market
  place
• The monetary policy transmission mechanism moves
  through market rates
• Sweden has a market maker driven market that has
  worked very well with high liquidity over time
• Sweden is in comparison to other markets and
  monetary policy areas small but with active
  domestic as well as international investors
• Liquidity important to reduce SNDO and other
  issuers lending costs
• Institutional investors need for risk adjustments
  and low transaction costs depends on bid/offer
  spreads and market turnover
• Market functionality is important for the whole
  Swedish society - directly or indirectly

4
General market situation and Monetary Policy

• Since summer 2007 - global market distress with
  lower liquidity and higher volatility in general
• In this environment, it is of most importance
  that Monetary Policy is characterized as
  transparent and predictable
• Communication is crucial in order to make the
  market functionality efficient
• Frequency between meetings is approximately 2
  months the clock does not stop in between and
  the pricing process is continuous
• Feb 13, 2008 publication of policy decision - an
  example

5
Monetary Policy publication Feb 13, 2008

• 100 in analyst poll expected policy decision to
  be on hold
• Market prices - very high probability of
  unchanged repo rate
• Escalated credit crisis, US economy downfall,
  massive Federal Reserve cuts, general decline in
  global economy considered important by market

6
Why did prices move more than necessary?

• Obviously, the market did not interpret the
  Riksbanks intentions correctly
• Nor did the Riksbanks board members signal that
  the market was mispriced strongly enough
• Specifically, the market underestimated the
  analytical importance attached to the rise in
  inflation expectations by the Riksbanks board
• Some additional communication might have created
  the following situation
• Uncertainty was expected regarding votes e.g.
  2-4, 3-3 or the actual 4-2 among market
  participants
• A rational market would expect something between
  0 and 25 bp e.g. 12.5 bp
• Prices would have been adjusted by 12.5 bp in the
  shortest maturities and much less than /- 12.5
  bp for longer maturities the day of publication
  compared to the actual gt20 bp parallel shift up
  to 2 years.

7
Announcements of policy decisions and volatility
8
Moving forward

• The market maker community would like to see more
  communication between meetings
• In times of distressed markets and rapid changes,
  the need for communication between meetings
  increases
• A proposal is that individual board members
  should express their view on relevant new
  information as well as what type of factors they
  regard as important for their thinking this
  should not be expressed nor interpreted as pre
  commitments in relation to near term policy
  decisions
• Irma Rosenbergs latest speech when she did
  address development after the latest policy
  meeting is a definitely a step in the right
  direction hopefully a start of an adjusted
  praxis within the current information policy!