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Monetary policy in the coronavirus crisis

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Monetary policy in the coronavirus crisis

Quickly shifting focus to the present – economic freefall and need for previously untried measures

Published: 7 April 2022

In an environment that is constantly changing, the Riksbank, like other central banks, has in recent decades needed to develop its contingency preparedness, ability and flexibility to act quickly and in several different ways. When it was found in March 2020 that the highly contagious coronavirus had resulted in a pandemic and a major global economic downturn was to be expected, the ability and flexibility of central banks, governments and authorities were tested worldwide. A unique situation arose, when restrictions were introduced to limit the spread of infection and people also voluntarily restricted their social lives to avoid becoming ill. The consequence was that economic activity in the world suddenly and sharply weakened. Swedish GDP plummeted and the conditions for the Riksbank to attain the inflation target were radically altered. However, unlike monetary policy in normal times, which looks a couple of years ahead, the measures in the crisis were mainly focused on supporting the economy in the near term, and reducing the risks of significantly worse events in the short term.[22] The assessments of the economy both in the near term and in the longer run, depended on a number of domestic and global factors that were genuinely uncertain, and whose effects on the economy were very difficult to assess. In the report published in April 2020, the Riksbank chose not to publish a main forecast but instead two alternative scenarios. Thereafter, the Riksbank continued to report alternative scenarios around a main scenario, as a way of reflecting the great uncertainty about future developments.

It quickly became clear that the Riksbank needed to think in new ways, not only in terms of working methods and decision-making processes but also in terms of what measures needed to be implemented. The focus was on understanding developments in real time and responding with appropriate, but in some cases untried, tools to address acute problems as they arose. There was a risk, during the most turbulent stage of the crisis, that it would develop into a financial crisis. Without a stable financial system, it is not possible to conduct an effective monetary policy, as the transmission mechanism will not function. A financial crisis also has a direct negative impact on growth and employment. Thus, the measures implemented by the Riksbank had the dual purpose of maintaining financial stability and supporting the real economy, to attain the inflation target.[23] For a description of the measures taken by the Riksbank to counteract the effects of the pandemic on the economy, the sequence of events on the financial markets during spring and summer 2020 and how lending to households and companies developed, see for instance Gustafsson and von Brömsen (2021). Close cooperation was required between different policy departments at the Riksbank and in a short time the Executive Board had to take several decisions that posed major and new challenges, both in terms of formulation and implementation.