Svensson: Why a lower repo rate path?

“In this speech, I would like to explain why I entered a reservation the most recent monetary policy meeting and justify why I preferred a lower repo rate. I will also explain why I consider that mean squared gaps should be used, to a greater extent, as a measure of the extent to which monetary policy has succeeded in stabilising inflation around the inflation target and resource utilisation around a normal level. Such measures entail a new step towards a more transparent and systematic monetary policy.

The Sveriges Riksbank Act and the preparatory work for it specify that monetary policy should be directed towards stabilising inflation around the inflation target and resource utilisation around a normal level. The lower repo rate path I advocated at the most recent monetary policy meeting would provide a better outcome for both inflation and resource utilisation, with both higher resource utilisation and CPIF inflation closer to the target. Such an interest rate path would not entail any problems for financial stability or the functionality of the financial markets. Housing prices and mortgages do not comprise stability problems and should not affect monetary policy. Any future problems on the housing markets, or, indeed, any future problems with financial stability whatsoever, can best be managed through regulation and supervision. The repo rate is an altogether too blunt and unsuitable instrument to be used for any other purpose than stabilising inflation around the inflation target and resource utilisation around a normal level. “