Flodén: Sweden needs its inflation target
"Sweden needs its inflation target. The inflation target represents a nominal anchor in the Swedish economy and is a major reason behind the favourable economic development in Sweden over the past two decades." This comment is made by Deputy Governor Martin Flodén as he addresses the Fores think-tank.
"For several years, inflation has been below target and this remains true even if we exclude the effects of falling energy prices and mortgage rates. The Riksbank's expansionary monetary policy with a negative repo rate is needed to maintain confidence in the inflation target, so it is not a matter of fine-tuning inflation to 2 per cent all the time", emphasises Mr Flodén.
In his speech to Fores Mr Flodén addresses the recent discussion suggesting that the Riksbank should reassess both its policy and the inflation target in various ways.
- Do not lower the inflation target – "Lowering the inflation target would not solve any problems. Higher, not lower, inflation and inflation expectations are needed to achieve a lasting rise in interest rates. In addition, it would hardly build confidence in monetary policy and price stability if we were to change the target as soon as it became a struggle to achieve it", notes Mr Flodén.
- Risks inherent in greater tolerance for low inflation – "Inflation has been low for a long time and it cannot be expected that inflation will eventually return to 2 per cent if monetary policy shows an even greater tolerance for low inflation. The stabilised inflation expectations and the upward trend in underlying inflation must be considered in the light of the expansionary monetary policy", says Mr Flodén.
- The repo rate is a doubtful tool for restraining indebtedness – Mr Flodén emphasises that the Riksbank has long been uneasy over the trend of rising debts. However, the repo rate is a blunt tool when trying to slow increases in household debt and housing prices as it influences so much else in the economy. In addition, he argues that a considerably higher rate would likely be needed in order to have an obvious effect. "Inflation and growth would probably be held back relatively powerfully. And neither low inflation nor weaker growth would contribute to a sustainable rise in the interest rate level", Mr Flodén points out.
Read the entire speech "Sweden needs its inflation target" and the slides shown by Mr Flodén via the links below.
