Skingsley: The way from the financial crisis and forward – the development of monetary policy

In combination with a series of other reforms of the 1990s, such as the budgetary framework, inflation targeting has contributed to favourable economic development in Sweden: low inflation, high GDP growth, stable increases in real wages, a current account surplus and low national debt. Moreover, inflation targeting remains the dominant regime among more or less all central banks in countries with floating exchange rates. First Deputy Governor Cecilia Skingsley made this observation on Tuesday when she spoke on recent decades’ economic developments in Sweden at the seminar Öhman Perspektiv in Stockholm.

Date: 28/01/2020 17:15

Speaker: First Deputy Governor Cecilia Skingsley

Place: Öhman, Berns, Berzelii Park, Stockholm

The conditions for monetary policy changed, however, with the global financial crisis of 2008 and subsequent euro area debt crisis of 2010–2012, which left its mark in the form of steeply falling GDP growth and lower productivity growth both internationally and in Sweden. In addition, global interest rates have fallen to exceptionally low levels since the 1980s, among other things due to an ageing population and increased saving.

“The low level of interest rates has made it more challenging for central banks to conduct monetary policy,” Skingsley points out. In recent years, the Riksbank and many other central banks have cut their policy rates to historically low levels and have also supplemented this with comprehensive purchases of government bonds to make it possible to contribute enough stimulation to maintain low and stable inflation. “Our monetary policy has contributed to the strong economic activity we have had in Sweden and has helped inflation to stay around our inflation target in recent years.”

“The Riksbank does not lack possibilities to counteract future downturns, but the low level of interest rates makes it more difficult. It is therefore important that the Riksbank continues to have access to a complete toolbox. However, just because monetary policy can become more expansionary if necessary does not mean that this is the best medicine. Many of the problems that the global economy is currently struggling with are highly structural and other policy areas would probably be more effective, even if monetary policy can help to a certain extent,” Skingsley said.

Skingsley also commented on the Riksbank's latest interest rate decision in December. “With attainment of the inflation target having been good since 2017, I saw convincing reasons to raise the policy rate to zero percent.” The Riksbank’s forecast is that the policy rate will remain unchanged in the years ahead. “We are in a wait-and-see situation,” said Skingsley. “Since the monetary policy meeting in December, international development mostly looks likely to continue stabilising, even if uncertainty remains high.”

Updated 28/01/2020