Mervyn King Report Used by Riksbank to Get Broader Price Mandate

Sweden’s central bank said a report co-authored by the former head of the Bank of England supports the view that it should sometimes be given more time to reach its inflation target than the current two-year horizon.

Any delay must be clearly justified to Sweden’s parliament, the Riksbank said in a consultation response to a review of its policy written by Mervyn King and Marvin Goodfriend. The Riksbank also argued in favor of a broader mandate that would give it more influence over financial stability.

“A well-balanced monetary policy can in some situations mean that the Riksbank assesses that it will take more than two years for inflation to return to the target,” the bank said. “Examples of such circumstances include major disruptions that affect the economy over a long period of time or changes in relationships within the economy that are assessed to affect the impact of monetary policy over a longer period of time.”

King and Goodfriend in January published a report commissioned by Sweden’s parliament with proposals on how to improve Swedish monetary policy. In addition to giving the Riksbank more leeway to reach its price target, the review recommended that the bank change its inflation gauge and re-introduce a tolerance band around the 2 percent target.

While the Riksbank hasn’t yet taken a position on whether to change the inflation gauge, it said there are several advantages to adjusting the variable for the inflation target to gauges that correct for mortgage rates or a harmonized consumer price index, which also strips out changes to mortgage costs.

The Riksbank has been criticized for consistently producing optimistic inflation forecasts, which the review partly blamed on an over-confidence in outdated economic models. One former board member has even alleged that the bank deliberately shapes its forecasts to avoid interest rate cuts.

A heated disagreement about whether the Riksbank should use policy to stem record-high private debt led to the resignation three years ago of one of its six board members, Lars E.O. Svensson. Both debt and house prices have since continued to spiral.

“The executive board considers that the role of the Riksbank in preventing and mitigating risks and vulnerabilities in the financial system, including macro-prudential policy, needs to be strengthened,” the bank said on Thursday. Sweden’s financial watchdog “should –- without further delay –- be given the legal powers and tools to be able to counteract risks that have arisen,” it said.

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