Ingves: Structural trend shifts need to be included in monetary policy analysis

Long-term trends play an important role in monetary policy. The long-term real interest rate and the long-term sustainable level of resource utilisation are of particular importance. The long-term real interest rate abroad has shown a falling trend for a long time and this is one reason why interest rates in Sweden and many other countries are unusually low.

The period following the financial crisis was special in Sweden in several ways, but also in other parts of the world. Both inflation and wage increases have been lower than expected, at the same time as resource utilisation has on average been largely normal and the central banks’ policy rates have been low. Commonly recurring explanations for the low and slow development in prices and wages are globalisation and digitalisation. But Mr Ingves pointed out that there are also other changes in trends on the Swedish labour market following the financial crisis that may have contributed to the low prices and wages – an increasing number of people entering the labour force, compensation rates in the social insurance systems falling and employees’ negotiating power appearing to have weakened. Mr Ingves also said that the weaker covariation between unemployment and wages need not necessarily mean that the impact of monetary policy had weakened.

Lastly, Mr Ingves discussed monetary policy under uncertainty. Changes in trends are often difficult to detect immediately and also difficult to assess. One consequence of this is that central banks should act more cautiously and rely more on historical correlations that are more certain. This uncertainty principal is often referred to by central banks and can be one reason why they are sometimes perceived as “sluggish” in their behaviour.