World's Oldest Central Bank May Soon Unveil New Inflation Regime

  • Sweden’s Riksbank is expected to announce change this week
  • Bank has struggled to live up to its inflation mandate

Regime change could be around the corner for the Riksbank.

The new framework might be unveiled in connection with a speech by First Deputy Governor Kerstin af Jochnick on Thursday, entitled “Monetary policy and the inflation target – the importance of clarity and openness,” according to Swedbank and SEB, two of Sweden’s biggest banks. The Riksbank had signaled such an announcement would probably come before its September policy meeting.

Policy makers have been digesting feedback on a proposal they made in May that would give them more leeway in meeting the 2 percent inflation target. The bank, which has been around for 3 1/2 centuries, suggested it would start targeting a price index that factors out mortgage costs (called the CPIF) and introduce a “variation band” of 1 percentage point around the target.

Read more on the bank’s proposal here

SEB says such a change would probably strengthen the krona, which is already gaining amid speculation the bank is reaching the end of a period of record stimulus. Inflation finally hit 2 percent last month for the first time since 2011. That followed years of monetary easing that drove rates well below zero as well as bond purchases.

“I would be very surprised if they don’t introduce the variation band,” Robert Bergqvist, chief economist at SEB, said by phone. “And the timing for it is even better now that core inflation is running above 2 percent since they won’t risk signaling that they are giving up on reaching the target.”

Bergqvist expects the new regime to give the market “more flexibility in relation to the Riksbank and that should lead to a stronger krona,” he said.

To be sure, the central bank in May downplayed any impact from a new inflation regime. It said that CPIF has been used as an operational target already and that the aim of monetary policy will continue to be the stabilization of inflation at 2 percent. The “variation band” is also not a “target range” the bank said, meaning it will still strive toward 2 percent inflation.

Knut Hallberg, a senior analyst at Swedbank, says this means any market impact should be negligible. “The Riksbank has really gone to great lengths in emphasizing that this is not to be interpreted as any form of policy change but rather a communicative tool,” he said by phone. 

The bank might announce the changes in the morning before af Jochnick’s speech and then have her elaborate on the deliberations that led to the decision, he said.

Riksbank spokeswoman Susanne Meyer Soderlind said on Aug. 16 no decision had been made yet on when to announce the shift. The bank is still going through responses from the consultation process, she said.

Sweden’s Financial Supervisory Authority advised against the Riksbank’s proposal, saying the bank should wait for the results of a parliament-appointed review, which are expected in in less than two years.

But SEB’s Bergqvist says the Riksbank’s plan is largely uncontroversial.

“I don’t see why they should await the committee,” he said. “We have previous experience of a similar band and most consultative bodies think it’s a reasonable step to take.”

— With assistance by Zoe Schneeweiss

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