Ingves: Time to rethink - inside the head of a central bank governor
“We find ourselves in a situation where the strategies and regulatory frameworks followed by central banks in the past decades must be reassessed.” This is how Governor Stefan Ingves starts his speech at the Stockholm School of Economics on Wednesday. The challenges facing central banks are not only a result of the experience gained during the latest crisis. They are also to do with structural changes in the financial system, such as globalisation, as well as with various technological changes. These changes also affect the scope of countries and central banks to pursue an independent economic policy.
New payment methods place new demands on central banks
One such change is the ever-increasing competition to banknotes and coins from other means of
payment. Today, many payments are made electronically; when households and companies, for example, pay invoices and transfer money online or by mobile phone. Governor Ingves raises the issue of what responsibility central banks should have for the security and efficiency of electronic payments. For example, how important is it for confidence in the payment system that there is a "state means of payment"?
In any event, the development of new payment services places new demands on the Riksbank's RIX system which is the hub of the Swedish payment system. An example is the development of payments in real time, using, for example, the SWISH mobile phone app. "Such a payment service works even outside office hours – when the RIX system is closed. We therefore allow a certain amount of central bank money, in the form of credit, to be outstanding during the night", Governor Ingves says.
Monetary policy and financial stability go hand in hand
The winds of change are also blowing through monetary policy. Governor Ingves points out that the flexible inflation target is still working well. But experience and research suggest that there are some things within the monetary policy framework that perhaps should be changed to make everything work even better, and highlights, for example, the question of what is a suitable target variable and the need for a tolerance interval. Another question is whether flexible inflation targeting should take financial stability into account. There is a great deal to suggest that financial stability should in principle be an objective not only for macroprudential policy but also for monetary policy.
"I think it is obvious that there are close links between monetary policy and financial stability. The degree of financial stability affects how monetary policy measures influence inflation and employment. At the same time, price stability contributes to a safe and efficient payment system and facilitates stability in the financial system," says Governor Ingves.
Who takes responsibility for macroprudential policy?
As regards macroprudential policy, a complete rethink is necessary. There are significant flaws with vague mandates, unclear processes and inefficiencies that, in the long run, threaten financial stability in Sweden," asserts Governor Ingves.
He also points out that Goodfriend and King, in their evaluation, think that both the mandate and division of responsibility for macroprudential policy are in need of review: "From a socioeconomic perspective, it is possible to utilise the expertise, experience and resources in the macroprudential policy area, naturally possessed by the Riksbank in its capacity as the central bank, in a better way than is currently the case."
Central banks are the heart of the financial lifeblood
"A central bank is the banks' bank not just in financial crisis situations, but on a day-to-day basis, "24/7." We determine the price – the interest rate – of banks' payments between themselves, we supply cash and the central payment system and if something goes wrong with RIX, Sweden's financial lifeblood, it is the Riksbank's task to manage the situation. To reduce the risks of financial crises, with major socioeconomic costs, central banks need to have the mandate and tools to prevent crises, and have flexibility and liquidity when a crisis actually occurs", Governor Ingves concludes.
Follow the adjoining link to see the slides Governor Ingves is showing at the Swedish Economic Association.
