Ingves: Monetary policy and macroprudential policy in a globalised world
The financial crisis has demonstrated that a new way of thinking is needed in the interplay between monetary policy and the supervision and regulation of the financial markets, both in Sweden and abroad. Quite simply, we need to make more a greater concerted effort to avoid future financial imbalances. These comments were made by Governor Stefan Ingves during a speech at the Stockholm School of Economics on Wednesday.
Finansinspektionen has been given the main responsibility for the new policy area, macroprudential policy, that has emerged in the wake of the financial crisis. But as the policy areas need to interact, a close cooperation between the authorities is necessary, said Mr Ingves.
However, the debate in Sweden does not discuss at any length the need to coordinate macroprudential policy and monetary policy - and nor does it mention the fact that monetary policy may in some situations need to be changed to counteract financial imbalances. Here it seems rather that there is an assumption from the start that macroprudential policy and monetary policy do not have any points of contact, but can be conducted more or less independently of one another without problem. According to Mr Ingves, it is not possible to have such sharp dividing lines in today's complex world.
"If monetary policy is to carry out its tasks well, then macroprudential policy must function properly and most likely also vice versa," said Mr Ingves. We also need to cooperate on concrete measures that can resolve the problems we see today.
"My hope is that the discussions in the newly-formed Financial Stability Council will lead to the decisions that need to be made actually being made, even if they are sometimes rather uncomfortable decisions, in terms of politics."
Household debt – the largest domestic risk
Mr Ingves pointed to an obvious problem we need to manage today; Swedish households' indebtedness. The debt ratio has almost doubled in twenty years and this is not a sustainable development. We can scarcely remedy this problem without this having an effect on individual households and entailing costs for the economy as a whole.
Mr Ingves illustrated, with the aid of some very simple calculations, that of the measures now being discussed - the countercyclical capital buffer, the mortgage cap, tax relief on interest payments and requirements to amortise loans - the one with the greatest effect on households' incentives to take on loans was an amortisation requirement.
"The natural step would be to require amortisation of loans. The stock of existing mortgages would then decline. This would, moreover, give households stronger incentives to borrow less. This type of requirement would be reasonable and something that is considered self-evident in many parts of the world."
But Mr Ingves emphasised that other measures are also needed to have an impact on household debt. "We need to manage the poorly-functioning housing market and the shortage of housing that has pushed up prices and thereby indebtedness. The supply of housing needs to increase." Mr Ingves pointed out that it is important to act as soon as possible. If indebtedness and housing prices keep on increasing they will gradually reach levels that involve even greater risks and the economy will be even more sensitive to shocks.
Mr Ingves concluded by noting that the need for cooperation between policy areas is a given, but that it is uncertain exactly what shape the policy mix should take.
"However, we cannot delay in taking all of the concrete measures while waiting for research to supply us with the answers. The risks are too high for this."
Read the whole speech: Monetary policy and macroprudential policy in a globalised world
