Jansson: Time to scrap the inflation target?
Time to scrap the inflation target?
"No" says Deputy Governor Per Jansson in a speech today at Swedbank. But the question arises in that the criticism of monetary policy often leads to the conclusion that the inflation target is no longer necessary.
It is not strange that the Riksbank's negative policy rate is widely discussed/discussed in society. It is an unusual phenomenon and these are often questioned. Mr Jansson reflects in his speech on several of the questions raised with regard to the monetary policy conducted in general and the negative repo rate in particular.
Monetary policy is criticised for various reasons: because a negative policy rate is not healthy, because housing prices are rising, because the krona will become too weak or because the economy is already developing well. But regardless of the reason, the criticism often boils down to the presumption that the Riksbank should not do what it can to maintain the inflation target, despite confidence in the inflation target having declined quite clearly recently.
"In this sense one can say that the debate essentially concerns whether or not we should have an inflation target," says Mr Jansson. However, he would like to see a discussion of what the consequences would be if the Riksbank were to abandon the target. Perhaps it is because economic developments have been so positive for so long that one feels the existence of a credible nominal anchor is no longer as important? If so, I am convinced that this is a mistake," says Mr Jansson.
The negative repo rate has on the whole given the effects the Riksbank has expected. Inflation has been higher than it would otherwise have been and the fears of what might happen when the repo rate passed the zero mark have so far not been realised. Mr Jansson also emphasises that there is still scope to make monetary policy even more expansionary. However, negative policy rates are no panacea for the problems faced by monetary policy in recent years.
"We cannot rule out the possibility that we will sooner or later reach a situation where we assess that it is no longer possible or desirable to make our policy more expansionary. This is not at present in the cards, but if we were to find ourselves in such a situation – and I am saying IF – then we might have to accept that it would take longer than desirable to attain the inflation target. If such a situation were to arise, it would be extremely important to communicate clearly that the inflation target had not been abandoned, but that it will take longer to attain it. In the long run, inflation is nevertheless determined by monetary policy," argued Mr Jansson.
If one realises that the inflation target has not been abandoned, the damage in this type of situation would be much less. "We need continued confidence in the target to maintain smoothly-functioning price-setting and wage-formation, but also for monetary policy to be able to counteract future economic downturns," concludes Mr Jansson.
