Martin Flodén at the Riksdag Committee on Finance. Hearing on monetary policy
On Tuesday, Governor Stefan Ingves and Deputy Governor Martin Flodén are taking part in the year's first hearing on monetary policy at the Riksdag Committee on Finance.
Mr Ingves will present the background to the decision to cut the repo rate to –0,50 per cent. He will tell the Committee that even though the Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment, and has contributed to the upward trend in inflation since the beginning of 2014, inflation is now expected to be lower in 2016, compared with previous forecasts. A longer period of low inflation increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected.
In addition, there is still considerable uncertainty surrounding global developments, with low inflation and several central banks pursuing a more expansionary monetary policy in order to stimulate the economy and push up inflation. “We can choose to act now or wait for more information. In my opinion, it is better to be proactive as it is considerably more difficult to manage increased monetary policy stimuli abroad afterwards.”
At the same time, Mr Ingves will point out the risks associated with low interest rates. “There is an urgent need for reforms, both to improve the situation on the housing market, and to reduce the incentive for households to take on debt. Without such reforms, there is a clear risk of very poor economic development further down the line,” Mr Ingves warns.
Mr Flodén will begin by discussing the decisive factors in his monetary policy stance over the last 12 months or so. Inflation has been below target for a long time, which, together with falling inflation expectations, risked damaging confidence in the inflation target. In addition, monetary policy abroad has become increasingly expansionary, and we have seen a downward trend in real interest rates in recent decades. “With lower interest rates abroad, the Swedish policy rate must also be low; otherwise growth will be hampered and employment and inflation will be too low,” Mr Flodén says.
But an ever-stronger Swedish economy and resource utilisation in the economy that is rising and set to approach a strained level in the year ahead indicate that inflation will continue to rise. This was an important reason why Mr Flodén entered a reservation against the most recent decision to cut the repo rate. “I also believe that we are approaching the limit at which the impact of monetary policy starts to weaken. I therefore think that it is better to wait before cutting the rate further,” Mr Flodén concludes.
In the adjacent link you can find slides shown by Mr Flodén at the Committee.