Seperate minutes of the Executive Board meeting on 24 March 1999
Present:
Urban Bäckström, Chairman
Lars Heikensten
Eva Srejber
Villy Bergström
Kerstin Hessius
Lars Nyberg
Sven Hulterström, Chairman of the Governing Council
Kerstin Alm
Claes Berg
Björn Hasselgren
Richard Gröttheim
Hans Lindberg
Christina Lindenius
Fredrika Lindsjö
Pernilla Meyersson (§2, 1)
Robert Sparve
Åsa Sydén
Michael Wallin
Staffan Viotti
§ 1. Inflation Report/Account of monetary policy to the Riksdag's Standing Committee on Finance
Lars Heikensten presented a draft account of monetary policy to the Riksdag's Standing Committee on Finance /Inflation Report, Annex A to the Minutes. The Inflation Report reproduces the main features of the presentations and discussions of inflation prospects at the Executive Board meetings on 11th and 18th March 1999.
The Board decided to adopt the Inflation Report in accordance with the draft and that the Report be presented to the Riksdag's Standing Committee on Finance on 25th March 1999 at 8 a.m., at which time it shall also be made public.
This minute was immediately confirmed.
§ 2. Monetary policy discussion and decision
It was noted that Christina Lindenius and Hans Lindberg would draft the minute of this item on the agenda.
The monetary policy discussion began with accounts of the information about economic developments in Sweden and the rest of the world that had become available since the Board's preceding meeting (section 1). This was followed by a discussion of whether and to what extent the new information affected the assessment of inflation prospects that the Board had expressed in the Inflation Report. The Board's subsequent assessment of the monetary policy situation (section 3) started from an account of the conclusions that had been reached in a corresponding discussion in the Bank's monetary policy group.
1. Economic developments in Sweden and elsewhere1.1 International activity and inflation
The Board briefly discussed the development of international economic activity and inflation. It was noted that the recent statistics did not alter the earlier assessment, expressed in the Inflation Report.
The Board also noted that forecasts presented by other observers in recent weeks were broadly in line with the Report's main scenario. In those forecasts, growth prospects for the current year in the United States had been revised upwards, accompanied by some downward revision of prospects in the euro area. International price pressure was judged to be weak, in accordance with what had been envisaged for the Report's main scenario. The Board did, however, observe the price rise for crude oil occurring in connection with the oil-producing countries' discussions about future cuts in production. But in the prevailing circumstances this was not considered to warrant a revision of the path for the oil price assumed in the Inflation Report.
1.2 Developments in Sweden
The Board noted that there were major similarities between the Riksbank's assessment of inflation prospects in Sweden and the forecast that the National Institute of Economic Research published on 24 March 1999. The Institute considers, however, that the rate of inflation one to two years ahead will be somewhat lower than according to the Inflation Report's main scenario. The Institute envisages that the development of import prices and rents, for example, will be weaker than the Riksbank presupposes.
1.3 Financial markets
The Board noted that market players seemed to expect an unchanged instrumental rate in the United States, while the expectations of a repo rate reduction by the ECB had grown. It was also noted that survey data, as well as pricing in the Swedish money market, mirrored expectations of a small reduction of the Riksbank's repo rate in the near future.
The Board noted that the krona had been traded inside a relatively narrow range against the euro but that in effective terms it had tended to weaken, by about 1 per cent, in the past fortnight.2.
The Board's assessment of inflation prospects
The Board concluded that the new information about Swedish and international developments did not call for any change in the appraisal of Swedish inflation prospects compared with the assessment the Board had expressed in the Inflation Report. The Board accordingly noted that the Report's assessment of inflation prospects was the relevant starting point for the monetary policy discussion. In this context it was observed that the Board's assessment in the Report is based on the technical assumption that the Riksbank's repo rate is kept unchanged at 3.15 per cent up to the end of March 2001.
In the Report's main scenario, CPI inflation is judged to be below the 2 per cent target and to be 1.1 per cent twelve months ahead and 1.4 per cent in two years time.
The Board observed that the weak consumer price trend is partly explained by transitory factors that are judged to have no lasting effect on inflation and therefore should not influence the formation of monetary policy. The Board considered that in the present situation it was legitimate to disregard the effects that changes in indirect taxes, subsidies and interest expenditure can be expected to exert on the development of consumer prices one to two years ahead. Excluding these effects, UND1X inflation in the Report's main scenario is judged to be 1.7 per cent one year ahead and 1.8 per cent in two years time. At the same time, the risk of inflation being somewhat lower than in the main scenario is judged to be greater than the upside risk.
The conclusion from the Board's assessments, presented in the Inflation Report, was thus that, adjusted for transitory effects from indirect taxes, subsidies and interest rates, the rate of inflation one to two years ahead will be somewhat below the Riksbank's target.
3. The Board's assessment of the monetary policy situation
The Board meeting had been preceded by a discussion in the Bank's monetary policy group. The main conclusions from the group's meeting were presented to the Executive Board.
The discussion in the policy group had started from the Board's assessment of inflation prospects at its meetings on 11 and 18 March 1999 prior to the drafting of the Inflation Report.
In the policy group there had been relatively broad agreement that the repo rate should be reduced in that inflation was judged to be lower by some margin than the targeted rate of 2 per cent. The downside risk in the inflation assessment was noted in particular in this context. At the same time it was pointed out that the rule which the Riksbank normally follows—to lower the repo rate if inflation one to two years ahead is below the 2 per cent target and to raise the rate if the target is exceeded—cannot be applied mechanically. Consideration has to be paid, for example, to the situation in financial markets and to uncertainties in the inflation assessment.
The policy group had discussed and examined three alternative courses for monetary policy as a way of testing the validity of every argument and consideration that should conceivably be incorporated in the monetary policy decision.
The first alternative was to reduce the repo rate by 0.25 percentage points. The inflation prospects were considered to indicate a repo rate cut of at least this magnitude. It was noted that the next monetary policy discussion by the Executive Board was scheduled for as soon as 22 April, which meant that there would shortly be another appraisal of inflation prospects and the monetary stance. It was therefore judged that a reduction by more than 0.25 percentage points was not on the agenda even though it might be motivated by the subdued inflation prospects.
The second alternative was to keep the repo rate unchanged for a while longer. The inflation prospects admittedly pointed to a reduction but the policy group noted that some uncertain factors could possibly justify an unchanged repo rate. The uncertain factors identified by the group were the Government's spring budget, the unexpectedly strong trend in the United States, with its significance for international activity, and how a repo rate reduction would affect the exchange rate. All in all, however, the policy group considered that the spring budget would not have negative consequences for confidence in the formation of fiscal policy, neither would it affect the assessment of inflation in any decisive respect. It was also noted that in the near future there would probably not be any new statistics or other information that would make the international picture essentially clearer. It was also considered that a repo rate cut would not affect the exchange rate appreciably because a reduction had already been discounted in the financial markets.
Other considerations that might argue in favour of keeping the repo rate unchanged were that a rate below the ECB's instrumental rate might, for example, influence both the EMU debate in Sweden and how other EU countries regard Sweden's attitude to the ERM and EMU. The policy group was of the opinion, however, that the Riksbank's inflation target must be the guide and that circumstances of this kind are not to carry weight in the monetary policy decision.
The third alternative discussed by the monetary policy group was a repo rate reduction of 0.15 percentage points. That would be in accordance with the monetary policy framework associated with the inflation target, yet possibly elicit less reactions in the domestic EMU debate and in other EU countries. The group considered, however, that such a decision was liable to lead to the level of the ECB's instrumental rate being perceived as directly governing the Riksbank's monetary policy. It was also pointed out that a cut of 0.15 percentage points was too small, given the degree to which inflation was judged to deviate from the 2 per cent target. On the whole, this was considered to be the least attractive alternative.
The conclusion and recommendation of the monetary policy group was that the repo rate should be reduced by 0.25 percentage points and the interest rate corridor be left unchanged. The fact that this would bring the Swedish repo rate below the level of the ECB's instrumental rate was not considered to be of importance for the monetary policy decision.
The Executive Board focused its ensuing discussion on three main points: the Riksbank's repo rate in relation to the level of the ECB's instrumental rate; the monetary policy framework associated with the inflation target and its consequences for repo rate decisions; and how large a reduction should be in the prevailing situation.
In the discussion about the relationship between the Riksbank's and the ECB's instrumental rates, one member of the Board pointed out that in this situation there was a point in demonstrating that the Riksbank conducts an independent monetary policy based on an assessment of inflation prospects in Sweden. Another member considered that the Riksdag had given the Riksbank two assignments: maintaining price stability and preserving freedom of action for the possibility of EMU membership. The latter member noted that as inflation prospects in the euro area are subdued, it was probable that the ECB would shortly be lowering its instrumental rate, which would prevent any conflict between these two assignments from arising. A third member also expected the ECB to reduce its instrumental rate in the near future in the light of the subdued inflation prospects in the euro area. A fourth member noted that the Executive Board must adopt a position in principle concerning what governs the Riksbank's monetary policy actions. The Riksbank has the statutory objective of maintaining price stability. In addition, the Riksdag's decision in 1997 on Sweden's EMU participation gives the Riksbank the task, albeit not encoded in law, of preserving freedom of action for the possibility of Sweden adopting the euro. The member considered that in the formation of monetary policy, the statutory objective of maintaining price stability shall have precedence over other considerations. The Executive Board noted unanimously that the level of the ECB's instrumental rate should not have any direct influence on the monetary policy decision.
All members of the Board underscored that the inflation target and the associated framework are to guide the monetary policy decision. It was pointed out that inflation prospects are about as difficult to assess as at the time of the repo rate cuts in December 1998 and February 1999. Neither was the Government's spring budget considered to affect the inflation assessment in any decisive respect and if it did, that was something the Board would take into account in the future formation of monetary policy. Two Board members commented on how a repo rate cut would affect the exchange rate. One of them argued that the krona would not weaken because the financial markets had already discounted a repo rate reduction in the region of 0.15–0.25 percentage points. The other member was of the opinion that a temporary weakening of the krona might occur. In the light of this discussion, the Executive Board concluded unanimously that the repo rate ought to be reduced because, adjusted for transitory factors, the rate of inflation one to two years ahead was judged to be below the Riksbank's target.
This position left the Board with two main alternatives for the repo rate: a reduction by either 0.15 or 0.25 percentage points. Several members pointed out that there was an advantage in conducting monetary policy with clear, distinct steps in the repo rate. Altogether, five members considered that a reduction of the repo rate by 0.25 percentage points was appropriate in the light of the subdued inflation prospects. The sixth member declared a rather indifferent attitude to the choice between the two alternatives and was therefore willing to support the majority view.
4. The Board's decision
The Chairman summarised the discussion and noted that all the members of the Executive Board considered that the repo rate should be reduced by 0.25 percentage points.
The Chairman therefore proposed that the Executive Board decides
– to reduce the repo rate by 0.25 percentage points and announce a fixed rate repo with a duration from 31 March to 7 April 1999 at a rate of 2.90 per cent and a fixed rate repo with a duration from 7 to 14 April 1999 at a rate of 2.90 per cent, and
– to announce the reduction of the repo rate with the motivation and wording contained in the draft before the meeting of Press Release no. 23 1999, Annex B to the minutes.
The Executive Board decided in accordance with the proposal.
