Jansson: Contemplations of an interest-rate dove and inflation hawk

“I do not see the abolition of negative rates as an end in itself for the Riksbank”. These were the words of Deputy Governor Per Jansson in his speech at Danske Bank on Tuesday when he presented his view of current monetary policy and his reasoning at the most recent monetary policy meetings.

Date: 03/12/2019 14:30

Speaker: Deputy Governor Per Jansson

Place: Danske Bank, Stockholm

The inflation target shall always guide monetary policy

In his introduction, Per Jansson said that the fact he is considered an interest-rate dove needs to be supplemented by another epithet: an inflation hawk. When the most recent monetary policy decision was taken, it was not a certainty for him that the next repo-rate increase should occur as soon as was indicated by the forecast. It is crucial to constantly be very clear about the guiding role of the inflation target when designing monetary policy. Otherwise, a self-reinforcing process may emerge leading to average inflation “getting stuck” at too low a level. “Such a development would be problematic, not least as it would lead to the policy rate having to be negative more often and for longer periods,” Per Jansson said.

The inflation target has served us well

He also reminded people of the advantages of an inflation target and floating exchange rate as a point of principle. “The inflation target gave us an anchor for price-setting and wage formation and this has quite clearly helped provide greater orderliness in the economy.  And this has probably been an important explanation for the Swedish economy having developed so favourably since the crisis at the beginning of the 1990s”, the Deputy Governor continued.

He also pointed out that there is broad support for the inflation target and that this in turn should mean that there is acceptance of a weaker exchange rate when the Riksbank conducts an expansionary policy to maintain confidence in the inflation target. Development of the krona has been weak for a few years and there is no doubt that one reason for this is indeed the expansionary policy. But, Per Jansson added, this is far from the whole picture: “It is obvious that another part of the explanation is that currencies in small, open economies tend to depreciate when there is turbulence in the world.”

“The framework with an inflation target and floating exchange rate, which Sweden launched in 1993, is not perfect in all situations and for all events. But unfortunately, no perfect system exists and the interesting question is instead whether there is a better alternative. This reminds me of Winston Churchill’s evaluation of democracy as a form of government: 

‘Indeed it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.’

I think this is an apt quotation also for inflation targeting, so far at least.

Updated 03/12/2019