Ingves: The central bank's objectives and means throughout history – a perspective on today's monetary policy

  • Date:
  • Speaker: Governor Stefan Ingves
  • Place: Swedish Economic Association, Stockholm School of Economics
"Today we are experiencing very unusual times in monetary policy, with a repo rate below zero. To understand the current monetary policy we need to view it in an historical perspective." This comment is made by Riksbank Governor Stefan Ingves in a speech at Stockholm School of Economics on Wednesday.

The objectives and means of central banks have changed over the years, often as a result of economic crises. Sweden is no exception. "From time to time, economic developments have caused the prevailing monetary policy to be reconsidered, in particular when confidence in the nominal anchor has been undermined," notes Mr Ingves.

Long-term game rules create credibility

The experiences from the 1990s crisis showed, for instance, how important it is to have a credible nominal anchor. But perhaps the single most important thing was that we lay the foundations for a "norm-based thinking" that created long-term game rules for economic policy. For the Riksbank, this resulted in the inflation-target we have now. "And although several factors in addition to monetary policy have contributed to the low inflation, I would certainly claim firmly that the inflation target has functioned largely as intended," says Mr Ingves.

Financial stability and price stability are interlinked

The experiences from the most recent financial crisis have clearly shown that financial stability is a necessary condition for macroeconomic stability and price stability. "There are two reasons why financial stability and price stability are closely interlinked. Financial crises lead to weak economic development and difficulties in controlling inflation. And it becomes much more difficult to influence the economy via monetary policy if a financial crisis occurs," observes Mr Ingves.


"However, a condition for being able to give consideration to financial stability in our monetary policy decisions is that inflation expectations are well-anchored around the target and that inflation is fairly close to the target," he emphasises.


Developments in the wake of the financial crisis have also shown how dependent Sweden's economy is on developments abroad. If interest rates abroad fall, this has a restraining effect on the economy via the exchange rate, in roughly the same way as a monetary policy tightening. "We are affected by the fact that the ECB is now choosing to conduct a very expansionary monetary policy. In the slightly longer run this is good for the Swedish economy, but in the short term problems may arise if the krona strengthens so that inflationary pressures risk declining in a situation where inflation is already too low," says Mr Ingves.

Current monetary policy reflects earlier lessons

What happened in Sweden last year, when inflation continued to be lower than expected at the same time as inflation expectations continued to fall, has fairly dramatically changed the conditions for monetary policy. "Our current monetary policy takes into account all of the lessons learnt earlier. We are conducting a very expansionary monetary policy to preserve the credibility of the inflation target as a nominal anchor. But it is important to manage the risks linked to household indebtedness, as financial stability is a necessary condition for attaining the inflation target in the longer run," concludes Mr Ingves.


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