Flodén: My view of monetary policy and household debt
Monetary policy should in principle take into account households' high and rising indebtedness and the current low interest rate level entails the risk of financial imbalances building up. However, a lower interest rate is needed now despite these risks. This was stated by Deputy Governor Martin Flodén on Tuesday when he gave his first speech as member of the Executive Board of the Riksbank.
Although it has been possible to see some positive signs recently, both in the Swedish economy and abroad, there is still considerable uncertainty over developments abroad. Compared with other countries, the Swedish economy has developed well following the financial crisis. But developments have been divided. Households' strong finances have contributed to rising consumption and growing debt, at the same time as the corporate sector has experienced weaker development. This division comprises a problem for monetary policy and Mr Flodén therefore noted that it was not at present evident how monetary policy should manage the balance between inflation, the economic situation and the risks linked to the rise in housing prices and household credit.
According to Mr Flodén, monetary policy should, in principle, take into account financial imbalances and risks that may arise as a result of the monetary policy conducted. This follows on from the Riksbank's task of contributing to sustainable economic growth. However, it is not evident what this entails for monetary policy in practice.
Mr Flodén observed that the risks of a low repo rate over a long period of time need to be weighed against the opportunity to attain the inflation target relatively quickly. His conclusion was that there were several factors in favour of cutting the repo rate to even lower levels. One factor was that if a long period with a low interest rate gives rise to an upturn in housing prices and indebtedness, there may be reason for conducting a monetary policy that will contribute to attaining the inflation target quickly to be able to raise the repo rate slightly faster when inflation accelerates.
Mr Flodén summed up, saying "A lower repo rate now and faster increases in the coming period seems to me a better monetary policy, when weighing the risks against the opportunity to return to the inflation target sooner and to have a more balanced resource utilisation."
Mr Flodén said that it is good that a structure for macroprudential policy is in place, with one single authority, Finansinspektionen (the Swedish Financial Supervisory Authority) having a clear responsibility. At the same time, it is good that the Riksbank and other authorities also have a role to play via the financial stability council. Identifying and analysing factors that can give rise to financial imbalances is and will remain an important part of the Riksbank's work. Mr Flodén said that macroprudential policy measures, if implemented, need not necessarily affect his view of what monetary policy is currently appropriate – this will depend on the type of measures and the effects they have. However, he noted that such measures are important in general for monetary policy, as it is easier to conduct if financial stability is good.
Read the entire speech.
