Riksbank Review Favors More Flexibility on Inflation Targetingby and
Recommends price gauge, level should be set by parliament
Wants law change to clarify exchange rate a goverment matter
A review of the Swedish central bank’s mandate suggested policy makers should have greater scope to miss their inflation target, but also argued that parliament should get the final say in setting the price goal.
Co-written by former Bank of England Governor Mervyn King, the report recommended that the bank use an inflation gauge that strips out the effects of mortgage costs, while keeping the target at 2 percent. It said the Riksbank should be given more power to steer financial stability, while advising that the law be amended to make clear that any decision on the exchange rate regime “is a matter for government.”
“Where, in the opinion of the Executive Board, it is appropriate to deviate for a while from targeting inflation some two years ahead, the Riksbank shall explain its reasons and defend them in front of the Finance Committee” of parliament, the report said. The report also recommended revisiting the inflation target every 10 years.
The review comes amid a broader debate on how central banks can live up to inflation commitments amid slowing global growth and years of disinflation. Policy makers in Stockholm have cut rates well below zero, launched an unprecedented bond purchasing program and warned they may intervene in the currency market. Swedish inflation has hovered near zero for more than three years.
The Riksbank has been open to changing the inflation target. Deputy Governor Cecilia Skingsley told Bloomberg on Monday that the bank has the scope to make “smaller changes” in the framework such as shifting the price measure targeted and reintroducing a tolerance band, without legal changes.
Sweden’s central bank 19 months ago asked King and economist Marvin Goodfriend to evaluate how well it’s done in the five years through 2014, including when the Riksbank used its main lending rate to stem record private debt prompted by surging house prices.
U.S. Federal Reserve Chair Janet Yellen has criticized the Riksbank for raising rates too soon in part to fight a housing bubble. Nobel Laureate Paul Krugman has called the Riksbank’s policy “sadomonetarist” as he sided with his former colleague at Princeton University, professor Lars E. O. Svensson. Svensson resigned from the Riksbank’s board in 2013 after failing to convince the other five board members to increase rates at a slower pace. His departure followed repeated and public criticisms of Governor Stefan Ingves, whom Svensson accused of failing to live up to his mandate.
While King and Goodfriend didn’t criticize the Riksbank for raising rates starting in 2010, they did take policy makers to task for the tone of discussions on monetary policy.
“Differences of view and judgment are an important part of this process, but they must be expressed in a manner conducive to the collective venture on which the Riksbank is embarked,” they said. “It was not helpful that minutes and interviews by Board members displayed a degree of brusqueness uncharacteristic of normal public debate in Sweden.”