Ekholm: Why Swedish monetary policy needs to be more expansionary
An analysis of target versus means does not advocate using the repo rate as a tool for dampening debt in the household sector. Monetary policy is the most effective tool we have to influence inflation, while other tools are better suited to influencing household debt. Moreover, there are risks in allowing inflation to deviate from its set target over a long period of time. These comments were made by Deputy Governor Karolina Ekholm in a speech at Almega in Stockholm.
A recurring theme of the discussions on monetary policy in Sweden has been to what extent monetary policy should counteract risks linked to a high level of household debt. The majority of Executive Board members have opposed further cuts to the repo rate with reference to such risks. Ms Ekholm, on the other hand, has voted in favour of cutting the repo rate further, with reference to the low inflation rate and low resource utilisation in the economy. In her speech she explained the reasons for her stance.
Ms Ekholm said that the risks linked to household debt in Sweden are an important issue, but that there are several problems entailed in conducting a monetary policy that deliberately allows longer for inflation to attain the target level as a means of dampening debt. Moreover, the deputy governor pointed out that the current situation in Sweden means that the disadvantages of such a policy outweigh the advantages.
Ms Ekholm said that Sweden is not experiencing a general credit boom that needs to be dampened; the situation is that high housing prices are leading to a high level of household debt. However, it is difficult to use monetary policy to influence household debt without this having considerable negative consequences; inflation will undershoot the target and resource utilisation will remain low for a long period of time, continued the deputy governor.
She went on to point out that poorer target attainment over a long period of time entails risks in itself. The framework in which monetary policy is conducted has been established on the basis of the mandate of maintaining price stability, often specified as a target for inflation, as we have in Sweden. This has proved effective in anchoring inflation expectations and creating stability in the economy. However, the deputy governor went on to say that the framework is based on the central bank delivering an inflation rate close to its target.
"One must therefore take a stance on how long inflation can be allowed to deviate from the target, given the other trade-offs, without having consequences for inflation expectations, for the credibility of monetary policy as a whole and ultimately for target attainment in the long run," concluded Ms Ekholm.
Read the entire speech: Why Swedish monetary policy needs to be more expansionary
