Swedish voters will be able to influence their central bank’s mandate in September elections.
After the existing monetary framework failed to protect Scandinavia’s largest economy from bouts of deflation and job losses, an opposition bloc that polls show will defeat the government in four months, says it wants to broaden monetary policy to target a stronger labor market.
A coalition led by Social Democrats and the Green Party, which enjoys as much as 15 percentage points more voter support than Prime Minister Fredrik Reinfeldt’s tax-cutting government, says the mandate of the world’s oldest central bank is up for review after Sweden emerged from the crisis with Scandinavia’s highest jobless rate. Trying to steer price stability in isolation hasn’t worked well enough, they say.
“The inflation target has served Sweden well but it may be good to have a review and to have a discussion” about “what degrees of freedom do they have and what they’re looking at to make it easier to understand them,” said Annika Winsth, chief economist at Nordea Bank AB (NDA) in Stockholm.
Riksbank Governor Stefan Ingves argues the bank will meet its 2 percent price target in time. He also warns that continued easing risks spurring credit growth that may prove costlier to the economy than its current challenges. Swedish household indebtedness is at a record high, with mortgage holders owing their creditors 370 percent of disposable incomes.
Two former Riksbank board members,Barbro Wickman-Parak and Irma Rosenberg, criticized talk of introducing an employment target to the monetary policy mandate, in an opinion piece published in newspaper Dagens Industri today. To do so would “lead nowhere,” they wrote.
The central bank’s plight has spurred intense debate among economists both inside and outside the $550 billion economy. In April, Nobel laureate Paul Krugman accused the Riksbank of conducting “sadomonetarist” policies he said could push Sweden into a deflationary spiral similar to Japan’s.
Lars E.O. Svensson, who quit the Riksbank’s six-member board last year and has taught alongside former Federal Reserve Chairman Ben Bernanke at Princeton University, has also railed against the Riksbank for doing too little to bring down unemployment. He characterized the bank’s track record on meeting its inflation target as “poor.”
“The Riksbank has messed things up a bit since they for such a long time haven’t really succeeded in reaching their target,” said Michael Grahn, an analyst at Danske Bank A/S (DANSKE) in Stockholm. “They’re undoubtedly straying more and more from the target.”
Consumer prices in Sweden have fallen, on an annual basis, for the past four months. Headline inflation has remained below the Riksbank’s 2 percent target since the end of 2011. Meanwhile unemployment has risen, touching 8.7 percent in April, and is now 2 1/2 times the rate in neighboring Norway. It even exceeds joblessness in Denmark, where consumers and businesses are still grappling with the fallout of a burst housing bubble.
“The Riksbank hasn’t taken the inflation target seriously and as a result they’ve allowed unemployment to be higher than it otherwise would have been,” said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. “There’s been big discontent from unions that the Riksbank hasn’t lowered rates further and they haven’t been alone. A lot of people have thought that their focus on debt has been wrong and that they should have focused more on inflation.”
The Riksbank isn’t alone in struggling to chart policy in the aftermath of the global financial crisis. Policy makers at the European Central Bank are now considering further measures as soon as next month to galvanize a recovery in the euro area after traditional tools proved inadequate. In the U.S., the Fed is trying to unwind the largest balance sheet expansion in history.
The Riksbank has failed to meet its inflation target even as economic growth has outpaced expansion rates in much of the rest of Europe. The AAA-rated economy, which credit derivatives show is safer than Germany, will grow 2.8 percent this year, more than twice the pace in the euro area, the European Commission estimates. Public debt is about 40 percent of gross domestic product, less than half the euro-area average.
The Riksbank was quick to cut its benchmark rate in 2009 to as low as 0.25 percent, before moving it back to 2 percent in 2011. It has since reversed course lowering it to 0.75 percent in December. Economists, who say the bank’s policy signals are hard to interpret, now expect it will have to cut rates in July to support growth and boost inflation.
The bank last month signaled greater willingness to cut and pushed back tightening plans until the second quarter of next year.
Sweden’s Green Party said this week it will consider asking the Riksbank to follow a similar dual mandate to that used by the Fed. The Social Democrats, the largest opposition group, have made similar remarks.
“We’re open to discussing” such a target, Per Bolund, economic spokesman for the Greens, said in an interview. “We’ve also had that discussion in the Green Party and seen both advantages and disadvantages. It’s obvious that unemployment is a very big societal problem and a very big economic problem.”
Bolund said it’s important that a “complementary objective” doesn’t mean that the bank is allowed to “ignore, for example, the problems with indebtedness and have the lowest possible interest rates.”
“There is a risk that we build up other problems instead, but it’s a discussion that I think is well worth having,” he said.
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