Ingves: Monetary policy challenges – weighing today against tomorrow
“Conducting monetary policy is about managing challenges – weighing the effects of today’s monetary policy against the effects and challenges it will bring tomorrow.” These were the words of Stefan Ingves on Tuesday, when he addressed the Swedish Economic Association.
Mr Ingves noted that these are certainly unusual times in the Swedish economy, with a good level of economic activity at the same time as monetary policy is expansionary. But, as inflation has long been below target, an expansionary monetary policy is needed to stabilise inflation at two per cent.
It is also likely that the global interest rates will remain low for some time. Consequently, it may become more difficult to stimulate the economy with interest rate cuts if economic activity becomes weaker and inflation is still below target. "In such a case, it could be necessary, both for the Riksbank and other policy areas, to implement other measures," said Mr Ingves.
The Riksbank should have a clearer role in financial stability
In addition, we must take account of the manner in which the low interest rates affect the financial system. A stable system forms a condition for monetary policy, and also fiscal policy, to succeed in our present situation. Consequently, monetary policy needs to be complemented by an efficient macroprudential policy, among other things. And here, considers Mr Ingves, the Riksbank could play a greater role than it has so far.
"As I have pointed out several times previously, I think it would be good if the Riksbank were to be given an extended mandate to prevent financial crises and, at the same time, were to be allocated more macroprudential policy tools," said Mr Ingves.
The Riksbank's responsibility in this area is expressed in the legislation as the task of promoting a safe and efficient payment system. "In my opinion, the Riksbank – in common with a number of other central banks – should have the explicit responsibility for financial stability and this responsibility should be clarified in the Sveriges Riksbank Act. I hope that this matter is dealt with in the review of the monetary policy framework and the Sveriges Riksbank Act," continued Mr Ingves.
It is also of decisive importance for stability that the Riksbank continues to have strong possibilities to provide liquidity support in foreign currency to banks in crisis. "To be able to do this, the Riksbank needs to have a foreign currency reserve of at least the same level as today," Mr Ingves pointed out in conclusion.