Ingves: Central bank balance sheets increasingly important for monetary policy

It is now clear that the economic consequences of the spread of the coronavirus threaten to be both serious and protracted. “We are in the midst of a situation that needs to be handled with various macroeconomic tools, and the Riksbank has an important role to play here, together with the Government, the Riksdag (Swedish parliament) and other authorities,” Mr Ingves said by way of introduction.

The Executive Board of the Riksbank has already taken a large number of decisions to support the Swedish economy and many of the measures have clear consequences for the Riksbank’s balance sheet, which is to say the Riksbank’s assets and liabilities.

However, it is not just in times of crisis that a central bank may need to use its balance sheet to support the economy. “As things look now, there is considerable probability that global interest rates will remain low over a long period of time. Monetary policy will then have to find other ways of working to attain the inflation target than those we are used to, and many of the measures will have consequences for the balance sheet”, Mr Ingves continued.

Appropriate monetary policy requires freedom of action

From this perspective, the proposal for a new Sveriges Riksbank Act presented by the Riksbank Inquiry risks restricting monetary policy's possibilities of conducting a well-balanced monetary policy in the future. The Inquiry’s proposals seem very much to be grounded in a belief that Sweden will be able to return to a monetary policy that only needs to regulate the policy rate to achieve the desired results. But if real interest rates continue to be as low as they have been over the last ten years, what we have previously regarded as extraordinary measures will become necessary elements of normal monetary policy. It is therefore important that the new Sveriges Riksbank Act does not restrict these possibilities. “The balance sheet is our toolbox,” Mr Ingves concluded.