af Jochnick: Monetary policy and the inflation target – the importance of clarity and openness
“Formalising the CPIF as the target variable for monetary policy and making our own forecast of the repo rate are two important elements of a clear and open monetary policy communication”. This comment is made by First Deputy Governor Kerstin af Jochnick on Thursday, at Ratio’s seminar on current issues in the Swedish economy.
Date: 24/08/2017 12:00
Speaker: First Deputy Governor Kerstin af Jochnick
Place: Ratio, Sveavägen 59, Stockholm
Ms af Jochnick observes that the CPIF has already been the Riksbank's target variable for many years, so formalising the CPIF as the target for monetary policy would not entail any real change, but would only be an adaptation of current practice. The CPI inflation measure is affected by the Riksbank's own policy rate changes. These adjustments have large and direct effects on the CPI which are not connected to underlying inflationary pressures. The Executive Board has therefore in practice used the CPIF, which excludes interest rates changes, explains Ms af Jochnick.
She points out that the Executive Board is now also considering reporting a new variation band of +/-1 percentage points. This is not a so-called target range. The Riksbank would always strive to attain 2 per cent inflation, regardless of whether inflation was currently within or beyond the fluctuation band. The band would be there to illustrate the fact that developments in inflation are uncertain and to remind people that inflation will not be exactly 2 per cent in each individual month. The band can help provide some perspective on what monetary policy can and cannot achieve, says Ms af Jochnick.
"In the spring we sent out a proposal regarding the target variable and variation band for consultation. During the summer we have compiled and analysed the responses we received. The work is going according to the plan we announced earlier. We are therefore counting on being able to make a decision on this question in connection with the monetary policy meeting on 6 September. But it is important to point out that these proposals would not entail any change in the policy conducted," she explains.
Repo-rate path - for clear and transparent communication
Ms af Jochnick points out that the repo-rate path has also benefited the Riksbank's work on monetary policy. "The Riksbank's internal work on the material for monetary policy decision-making has improved. The possibilities for an open discussion and external evaluation of monetary policy have also improved due to the Riksbank's publication of its own forecasts for the repo rate," she says.
"At the same time, the forecast work has been challenging with the financial crisis, the euro crisis, and falling global rates, which have made it more difficult for both the Riksbank and other analysts to make accurate interest-rate forecasts; in this respect we have a lot of work ahead of us."
Ms af Jochnick says in conclusion that the very expansionary monetary policy in recent years has contributed to the current good economic development in Sweden, but that inflation needs continued support to remain close to the inflation target in the long run. This is why the Executive Board decided in July to hold the repo rate unchanged at -0.5 per cent. "During the summer, both growth and inflation in Sweden have been stronger than anticipated. But at the same time, the krona has also been strong. "We are currently working on what this means for current monetary policy, prior to our decision on 6 September," concludes Ms af Jochnick.