Jansson: Important that the Riksbank can support the economy in difficult times

“Government and central banks are working hard to mitigate the effects of the pandemic and to prevent permanent damage to the economy. But, in a world where interest rates continue to be very low, the challenges facing monetary policy will remain even after the pandemic is over.” These were the words of Deputy Governor Per Jansson today, when he spoke at a digital meeting arranged by Handelsbanken. “The international discussion on how monetary policy should best be designed is being brought to a head as central banks start to review their monetary policy frameworks. The next few years will decide which path we choose to go down.”

Date: 16/12/2020 10:00

Speaker: Deputy Governor Per Jansson

Monetary policy has challenges to deal with

One challenge is maintaining confidence in the inflation target so that it can continue to function as a benchmark for price-setting and wage formation. “This is the whole point of inflation targeting – I sometimes call it the very engine of the policy,” Per Jansson continued. Another is trying to ensure that monetary policy can fight recessions and sustain employment in difficult times. These challenges are connected and it is important to understand this.

Some have taken the view that the Riksbank should instead reduce its focus on the inflation target. But this, Per Jansson argues, would eventually exacerbate the problems: “Inflation and inflation expectations would fall when it became clear that the Riksbank was no longer trying to uphold the inflation target. We would then be in a situation with persistently low inflation and nominal interest rates. This, in turn, would make it even more difficult for the Riksbank to fight recessions with rate cuts in the future. And it would also make negative interest rates more common.”

Higher inflation target may have benefits

Something which has instead been discussed internationally is the possibility of raising the inflation target. Per Jansson sees benefits in this proposal: “It would make it easier for monetary policy to sustain employment and hold up inflation in difficult times. Although it may take time to create confidence in a higher target, I personally believe that the ability of central banks to drive the issue forward and together make a new higher inflation target credible should not be underestimated.”

Better interaction between economic objectives

Per Jansson also said that a broader approach is needed rather than just discussions on how monetary policy can be reformed. It is also necessary to review how the current economic objectives and guidelines interact with one another. “If we succeed in improving this interaction, the Swedish economy in general will develop more favourably, which must ultimately be what we all want to achieve”, said Per Jansson in conclusion.

Updated 16/12/2020