Sweden to Revisit Central Bank Mandate Amid Disinflation Era

  • Group to look at how to follow up monetary policy better
  • Will look at factors that have created new conditions

The committee overseeing Sweden’s central bank has formed a panel to review how to sharpen its work.

The inflation target will be one of the topics discussed, said Joergen Andersson, a Finance Committee member for the opposition Moderates. He said the panel was in part formed to address the Riksbank’s failure to reach its price goals.

“Considering that there are different views in the committee, I can’t imagine anything else than that this question will need to be touched upon,” he said in an interview on Monday. “Some in the finance committee think there’s a need to review the inflation target.” 

Officials are wondering how to revive inflation in Sweden.
Officials are wondering how to revive inflation in Sweden.

Sweden’s inflation targeting regime is under scrutiny from all sides after the Riksbank consistently missed its 2 percent price goal since 2011. Over the past year, the bank has unleashed unprecedented stimulus measures to revive inflation, but headline price growth has remained largely stagnant.

A number of economists and lawmakers have called for a higher price target while others have argued it should be lowered. Some are proposing that the Riksbank reintroduce a tolerance band, or that the bank operate with a dual monetary policy goal.

Reaching Target

“My hope is that we’ll look more closely at the underlying factors that have created new conditions for monetary policy and think about what it means,” Andersson said. “Perhaps it’s not so good to adjust the target just because the situation is different now. Not reaching the target also becomes problematic. One of the most important positions to defend is credibility.” 

Other lawmakers say inflation targeting is unlikely to be the main focus of the discussions.

“It’s going to look at how evaluation of the Riksbank can be improved, and how we can follow up monetary policy in a better way,” said Fredrik Olovsson, the Social Democratic chairman of the committee. “It’s very interesting to evaluate how well the bank reaches the inflation target, that’s very much what the evaluation is about.”

Much Power

It’s a problem when an institution with “so much power” and “independence” doesn’t deliver on its goal, he said. A review of Riksbank law would lie “further ahead in time,” he said.

Emil Kaellstroem, a Center Party lawmaker on the committee, said “a lot would need to happen before you go in and try to steer politically in that kind of detail. That would be a deviation from the order that we have, with the independence of the central bank.”

Ex-Riksbank Deputy Governor Karolina Ekholm, who’s now a top official at the Finance Ministry, said in an interview that officials should be careful in tinkering with the inflation target. But she sees no “hindrance” to adding a dual mandate of unemployment, she said.

The inflation target is currently “well balanced” and lowering it would be the worst of outcomes, she said.

“It would be quite risky to lower the target, as then you’d more often end up in a situation where monetary policy couldn’t be used to support the economy,” she said. A higher target might be better “in terms of decreasing the risk for reaching a lower limit for the repo rate,” she said.

Who’s Responsible?

The Riksbank lowered its key rate to minus 0.35 percent and this year embarked on a quantitative easing program. Andersson said he has repeatedly asked Riksbank Governor Stefan Ingves during committee hearings whether the bank would now be able to handle a slowdown in the economy, given the current starting point for monetary policy.

According to Nordea Bank, policy makers will likely add to stimulus when they meet next week by extending their bond buying program into next year. A failure to act would push the krona higher and cool inflation further, said Torbjoern Isaksson, chief analyst at the Stockholm-based bank, in a note.

A survey by SEB showed more than 50 percent of investors expect the bank to raise its bond purchase by year end.

“Is it okay to put all energy on reaching the target without considering what happens at the other end?” Andersson said. “Who takes responsibility for financial stability, and how big a role should that play? How do we handle a slowdown, with even more stimuli?”

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