Chat with Stefan Ingves 5 July 2011
Governor Stefan Ingves chatted in Swedish on the Riksbank's website. This is a translation into English of the questions and replies.
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In the 1990s the policy rate lost its power over the exchange rate. The countries’ debt burden was then reflected in the exchange rate instead. Can the policy rate in Sweden really affect the price of goods and services on a global/European market with free movement? Isn’t it true that the policy rate as a method of steering inflation will soon be extinct? Gunnar
Reply: When the policy rate is increased, it becomes more expensive to borrow and this affects demand in Sweden, the exchange rate may also strengthen and this in turn affects exports. In both cases economic activity in Sweden is affected, and this takes place in a globalised world, as long as we have our own currency. In other words, the policy rate will continue to function. This is my final reply on this occasion. I would like to thank all of you who have shown an interest in the Swedish economy and the Riksbank’s monetary policy. I wish you all a pleasant summer.
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The Federal Reserve is printing new dollars; the ECB is printing new Euro (how else would they be able to fund all the support packages). This should mean inflation in these 2 world currencies and all currencies pegged to them. Does it mean that the Swedish krona will strengthen in relation to these currencies, as we have an explicit target of low inflation, or will we have to count on high "imported" inflation, with higher food and energy prices that the Riksbank cannot deal with? Fredrik Johansson
Reply: All of the three central banks you mention have, in one way or another, an inflation target in line with ours. It is therefore difficult to see any special exchange rate effect in the longer run, assuming that we can all three manage to attain our similar targets.
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I just cannot understand how the Riksbank can have a forecast where CPI is constantly above 2% up to the year 2014 and at the same time have a target where it should be 2%. Doesn't this undermine the credibility of the inflation target, when one is constantly overshooting and even counting on overshooting the target in the future? It seems as though you give more consideration to the CPIF, at the same time as you are specifically writing that it is the CPI that is important. Pelle
Reply: Sometimes we overshoot the target and sometimes we undershoot it. It is quite simply not possible to use the repo rate to steer the economy in detail so that we are always exactly on target. The important thing is that we are sufficiently close to the target. More than this we cannot do. As the repo rate was first cut substantially and since then has been raised and will be raised further according to our repo rate path, we are unable to avoid this phenomenon. In the long run the CPI and the CPIF will coincide.
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Why is deflation dangerous? With regard to, for instance, electronics, one can wait for a year to get a better product at a cheaper price and things are going well for this industry. Fredrik
Reply: If everyone waits until everything gets cheaper, no one will be buying anything today, and then economic activity will come to a halt and unemployment will rise. Price falls on individual goods are a completely different thing, then there is just a price adjustment between goods.
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Why is your inflation target 2%? Why not 3, 4, 5 or 0%? Gustav
Reply: It is not possible to calculate a particular “correct” figure. The choice of percentage is a question of judgement. We want to be sufficiently above zero so that we do not sometimes suffer deflation. At the same time, the target should not be too high, because then one would have to include the inflation rate all of the time in all economic decisions, and this does not promote economic development.
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Why do we have an inflation target of 2%? Fredrik
Reply: High and fluctuating inflation causes difficulties for all types of economic activity. Low and stable inflation makes it easier to produce, buy and sell goods and services. It promotes economic development, something everyone benefits from.
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What do you say about the fact that not all the members were agreed on raising the repo rate? Max
Reply: There is nothing strange about this. The decision-making system is created to handle differing opinions. It was manageable on this occasion as on several previous occasions.
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On the website you write that "CPI inflation is high at present as a result of rising mortgage rates”. A higher repo rate will lead to higher mortgage rates and thus also higher CPI. So how can an increase in the repo rate slow down inflation so that you attain the target of 2 per cent? The wording above would imply that the one factor triggers the other. Thomas Nordqvist
Reply: In addition to interest rate increases and rising mortgage costs, all other prices can rise if demand in the economy is too higher. One avoids this by raising the repo rate. When the repo rate has reached an appropriate level, the repo rate increases will no longer affect the CPI and the effect you describe disappears.
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How can you raise the repo rate when Swedish export companies are suffering? Martin
Reply: Swedish exports are currently doing well and we expect this situation to continue. The current interest rate level is also fairly low and does not create any problems for these companies.
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Is it correct that the CPIF gives an indication of future CPI and that the CPI is always the target? Oskar Johannesson
Reply: In the long run, both of the inflation measures will coincide. In the short run, when the repo rate is adjusted, the CPIF gives a clearer picture of what will happen in the economy as a whole, in addition to monetary policy and its direct effects on mortgage rates, and the CPIF therefore often gives good guidance in the short run, but this does not change the fact that the CPI is our target variable.
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How do you intend to deal with the fact that the Swedish krona is not appreciating at the same rate as your repo rate increases? This means that the krona will eventually be undermined and that we will instead have higher inflation. When the interest rate here increases in relation to other countries the krona exchange rate should also rise and thus push down inflation. Unfortunately it has not had that effect yet. Andreas
Reply: In theory, the krona should appreciate if Swedish interest rates rise in relation to other interest rates. In reality, the exchange rate is also affected by a number of other events that make it very difficult to observe the effect you describe in the short run. Our forecast is that the krona will appreciate further, but that the major appreciation has already taken place.
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What is your view of the risk that the Riksbank will push up CPI inflation with its repo rate increases. The CPIF is nevertheless still at a low level. Johan
Reply: When the repo rate is raised, CPI inflation rises because it includes mortgage rates. If the repo rate was not raised, inflation would rise and then both the CPI and the CPIF would eventually overshoot the target of two per cent. The CPI is always affected by interest rate adjustments, regardless of whether we raise or cut the repo rate.
