Jansson: Monetary policy in less favourable times – what are the options?

“Given the generally low interest rates that have arisen after the financial crisis, there is good reason to begin examining the possibilities for monetary policy to deal with the next economic downturn – whenever this might occur.” These comments are made by Deputy Governor Per Jansson in a speech published on the Riksbank’s website today.

Date: 04/12/2018 09:00

Speaker: Deputy Governor Per Jansson

Place: Insurance Sweden, Stockholm

Mr Jansson observed that in the short term, within the current framework, the Riksbank has a number of tools to counteract the next economic downturn. The repo rate will most probably have been raised at least somewhat and can probably be cut slightly lower than -0.5 per cent. The Riksbank can also influence expectations of the future repo rate and buy different types of financial asset.

But in a world where the neutral interest rate is low, as it is now, it is unavoidable that central banks' policy rates are not as effective tools as they were before. It is important that the question of how to stabilise economic activity in a situation where the Riksbank's possibilities are not unlimited is brought up on the economic policy agenda, said Mr Jansson. There are currently large reserves in fiscal policy, but using them is not without problems.

Mr Jansson said that if the low real interest rates persist, it may become necessary to modify the monetary policy framework with the 2 per cent inflation target that most central banks currently apply. "Of the various proposals circulating in international debate, I am currently leaning towards a raised inflation target being the best option. But this does not mean that this is something I feel we should do soon. A fairly major problem with this is that it is difficult to make this kind of change independent of other countries. However, it is always good to be well-prepared in advance and it is therefore worth starting to think about possible modifications now", concluded Mr Jansson.

Updated 04/12/2018