Flodén: Reasonable for the Riksbank’s balance sheet to shrink in the long run

The Riksbank should wind down most of its government bonds when monetary policy is normalised. By doing this, the Riksbank will minimise its financial risk and safeguard its future capacity to fund its own operations and conduct an independent monetary policy. These were the words of Deputy Governor Martin Flodén when he spoke at Swedish House of Finance in Stockholm today.

Date: 13/04/2018 08:00

Speaker: Deputy Governor Martin Flodén

Place: Swedish House of Finance, Drottninggatan 98, Stockholm

In other countries, arguments have been put forward in favour of central banks continuing to hold large bond holdings even when monetary policy has been normalised. But Mr Flodén does not consider this to be the right path for Sweden to follow. In his opinion, the arguments for a large balance sheet are not strong. Furthermore, there are risks associated with holding a large balance sheet.

These risks relate both to the central bank's ability to conduct monetary policy and simultaneously fund its own operations, as well as to its reputation and possibility to safeguard its independence in monetary policy issues. And compared with other central banks, the conditions for the Riksbank to bear risk are less favourable due to the limited use of cash.

Mr Flodén nevertheless thinks that asset purchases may still be needed in the future. "There is every indication that normal interest rate levels are lower than we previously thought. It is therefore more likely that the repo rate will touch its lower bound during future economic slowdowns. In such a scenario, bond purchases may once again be needed as a complementary monetary policy measure." Mr Flodén concluded.

Updated 13/04/2018