Bank Watchdog in Sweden Wants Rethink of Inflation Targeting

  • Swedish FSA says Riksbank can take longer to reach price goal
  • Existing policies adding to debt challenge in Sweden: FSA

Sweden’s financial watchdog says the central bank should consider allowing itself more time to reach its inflation target as existing policies drive debt burdens and create a regulatory headache.

“There is a choice how quickly you should reach the inflation target,” Financial Supervisory Authority Director-General Erik Thedeen said in an interview in Stockholm on Monday. “Quick or not so quick. If you choose not so quick, the interest rate path would be a little bit higher.”

Sweden’s central bank resorted to negative rates early last year, and has reinforced its stimulus program with government bond purchases to keep longer yields down. The polices are supposed to revive inflation, which has been below the central bank’s 2 percent target for about half a decade. But economic growth is around 3 percent, and Swedes are taking advantage of low rates to borrow more, fueling an already hot housing market.

“It’s sort of challenging for us and for Sweden to have policies, both central bank policy and tax policies, that are adding to the debt increase, and then try to hinder that development with different macro prudential tools,” Thedeen said. “I fully acknowledge that both tax policy and interest rate policy is not our responsibility but I think it’s important in our context as well.” 

The FSA got backing Tuesday from Sweden’s National Institute of Economic Research. Director-General Urban Hansson Brusewitz said the Riksbank can allow itself more time to reach its inflation target and needs to take into greater account the impact of its decisions on asset prices. A more expansionary monetary policy to achieve the goal increases the chances of a boom-and-bust cycle, he said. 

“If the Riksbank focuses on the inflation target, if it drives up asset prices so that it leads to a bubble that bursts, that could in the longer term mean risks to inflation, so that we get deflation going forward,” Hansson Brusewitz said in an interview.

Stimulus Agenda

The Riksbank board meets on Tuesday, one day before it announces its last rate decision of the year. Its six governors have made clear they’ll consider an extension of government bond purchases into next year. They also say there’s room for the benchmark rate to go lower than the minus 0.5 percent it’s at now.

According to the government’s latest economic forecasts, inflation will remain below the Riksbank’s 2 percent target at least until 2019.

Most analysts expect the Riksbank to extend bond purchases into next year, and some even expect a rate cut, in part to keep pace with stimulus measures pouring out of the European Central Bank. 

Fiscal Boost

Thedeen declined to comment directly on what the Riksbank should do at this month’s meeting. But he said that “generally speaking, most would agree that you have reached almost the lower end of what you can do with monetary policy.”

With the central bank running out of levers to pull, the pressure should shift to the government to provide any stimulus that might be needed, he said.

“Of course, if we need stimulus in a crisis situation, then more of the burden will fall on fiscal policy,” Thedeen said. It’s a position that Finance Minister Magdalena Andersson agrees with.

“Given that the effects of a rate cut on the economy as a whole probably become smaller when you have a negative interest rate, as it doesn’t feed through as much to banks’ interest rates to customers, of course monetary policy will have less of an impact,” she said in an interview last week.

That means the government may need to do more to support the labor market should the economy turn. Measures could include front-loading public investment and making sure that municipalities and regions don’t need to fire staff, Andersson said.

“If we end up in a downturn, that means that fiscal policy needs to stand more ready than before, and perhaps act earlier and more powerfully than in a different interest rate environment,” Andersson said. “I’m ready.”

— With assistance by Nick Rigillo

    Before it's here, it's on the Bloomberg Terminal.