Ekholm: Role model or warning example? Swedish experiences of taking indebtedness into account in monetary policy decisions
To retain control over inflation, it is important to show with one's actions that it is the inflation target that is the central focus for monetary policy decisions. This was one of the points made by Deputy Governor Karolina Ekholm when she spoke at the Confederation of Swedish Industry on Friday. She therefore welcomed the fact that the Executive Board was able to agree on a repo-rate cut in December.
However, she was critical that the repo rate had previously been held higher than was justified by the prospects for inflation and resource utilisation. According to Ms Ekholm, the policy conducted for most of 2013 is one of the clearest examples of a monetary policy that has tried to counteract the build-up of debt with reference to high indebtedness being a threat to financial stability. She also feels that it is an important contributory factor to the current low inflation rate. At the same time, she said that the effect on household indebtedness had been minor.
Although Ms Ekholm conceded that the low inflation was also due to low demand from abroad, she felt that monetary policy had contributed in different ways. For instance, it has led to a stronger krona, which has contributed to a fall in import prices and slowed down demand for Swedish-manufactured goods and services. This in turn has led to a particularly difficult situation for the export industry and wage increases have therefore been low. As the manufacturing industry sets the norm for wage rises, the situation there may have contributed to the low inflationary pressure in the rest of the economy, said Ms Ekholm.
Ms Ekholm warned that a monetary policy that entails inflation being low over a long period of time and not attaining the target involves risks. It can damage confidence in the inflation target and thus make it more difficult to stabilise inflation not only in the short term, but also in the long run. Using monetary policy to slow down growth in credit may therefore be difficult to combine with an inflation target. In practice, one is then trying to attain two targets with one single means and there is a risk that one will not be particularly successful in attaining either of them, she concluded.
Read the entire speech: Role model or warning example? Swedish experiences of taking indebtedness into account in monetary policy decisions
