The Riksbank responds to Flug and Honohan’s review of monetary policy, 2015-2020

News, Consultation responses Historically, 2015-2020 was an exceptional monetary policy period, with low inflation, a negative repo rate and strongly growing balance sheets in the central banks. The Executive Board welcomes the reviewers’ work and their assessment that the Riksbank’s inflation targeting policy 2015–2020 was well balanced.

It also agrees with most of the recommendations made in the review, such as the view that the experience with negative interest rates has generally been positive and that asset purchases should continue to be included in the Riksbank’s toolbox.

Reasonable to move from minus to zero interest rate in 2018-2019

However, the majority of the Executive Board does not agree with the reviewers’ conclusion that the repo rate was raised too soon from –0.5 to 0 per cent in 2018 and 2019. By then, after several years of strong economic activity, resource utilisation was higher than normal and conditions were considered good for a rate of inflation close to the target in the following period. At the same time, picking the right moment to tighten monetary policy is a question of judgement. During this period, some members of the Executive Board wanted to raise the interest rate earlier, while others wanted to wait.

Asset purchases were important

Neither does the Executive Board share the reviewers’ view that the Riksbank only carried out purchases of corporate bonds because it felt obliged to and that the programme was no longer needed. The Executive Board considered that the purchase decisions themselves had a dampening effect on the market and that, for reasons of credibility – in both the short and long terms – it was important to complete them. In addition, there was considerable uncertainty over developments, as the pandemic was not over and it was important to keep the level of interest rates down. Being present in the market also ensured a good capacity to scale up purchases rapidly should the situation deteriorate.

The Executive Board’s entire consultation response can be read via the link below.

The Evaluation of the Riksbank’s Monetary Policy

The review for 2015-2020 was carried out by Karnit Flug and Patrick Honohan and is the Riksdag Committee on Finance’s fourth external review of monetary policy. The external reviews are a complement to the Committee on Finance’s own annual reviews and its open hearings with the Governor and Deputy Governors of the Riksbank.

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Updated 25/05/2022