Af Jochnick: Unusual measures in unusual times – experiences of the Riksbank’s unconventional monetary policy
“The negative repo rate and bond purchases have brought the level of interest rates down. This has contributed towards good growth in Sweden – and towards inflation having risen.” These are the comments of First Deputy Governor Kerstin af Jochnick, speaking on Friday on experiences from and results of last year’s unconventional monetary policy.
"We adopted unusual measures in an unusual situation," states af Jochnick, describing the past year. She notes that inflation expectations started to lose their stable footing at two per cent – which itself was not so strange, considering that inflation had been low for a long time. When, in this situation, the ECB announced major bond purchases, the price of oil continued to fall and international developments were perceived as more uncertain, monetary policy needed to become more expansionary to safeguard confidence in the inflation target.
Combination of negative repo rate and bond purchases
As the repo rate had already been cut to a historically low level of zero percent by the start of 2015, a negative repo rate and purchases of government bonds were needed to increase demand and counteract the appreciation of the Swedish krona. And, according to af Jochnick, the unconventional measures seem to have had an effect. "Lower interest rates and a weaker krona that would otherwise have been the case have contributed – and continue to contribute – to both higher demand and employment, and to an upturn in inflation and inflation expectations."
"However, the low level of interest rates is not without problems. To obtain a functioning housing market and reduce the risks inherent in household indebtedness in Sweden will require action by the Government and responsible authorities," she states.
Valuable evaluation of monetary policy
In this context, the most recent evaluation by the Riksdag Committee on Finance is welcome. "One issue that Goodfriend and King point out – and that we have highlighted for a long time – is the need to clarify the allocation of roles and responsibilities for macroprudential policy in Sweden," continues af Jochnick.
She states that, in light of several years' experience of monetary policy and financial stability, not least in the years following the financial crisis, it is reasonable to consider what could be changed and improved.
"The Executive Board has also discussed some of the issues that Goodfriend and King take up, such as the objective of monetary policy, our forecast work and how we work with financial stability in Sweden. The evaluation includes several proposed changes that it would be worth examining," she notes.
Af Jochnick concludes with a reminder that the inflation target is important for the Swedish economy, as it benefits economic development by creating good conditions for economic decisions. Bringing inflation towards target continues to be given the highest priority and the Executive Board is therefore prepared to act if this is needed to safeguard the inflation target.
