Ingves: Flexibility is essential for the Riksbank in times of change
“The financial world around us is constantly changing and as a central bank we must then have a mandate and tools that can be used flexibly both in normal circumstances and crises.” This was one of the comments made by Governor Stefan Ingves today when he spoke at the National Economics Association about how the financial environment has changed in recent decades, and how the Riksbank is meeting the challenges that this entails.
Date: 31/05/2021 12:30
Speaker: Governor Stefan Ingves
Place: Swedish Economics Association (digitally)
Changes create new challenges
Over the past 10--20 years, technological developments, globalisation and various reforms have changed the financial environment. The financial sector has become an increasingly important part of the economy. We have gained new actors, new services and new financial innovations. “The changes are essentially positive and contribute to a favourable economic development. But they also entail new risks and challenges to society,” Mr Ingves pointed out.
E-krona – new cash?
Mr Ingves gave several examples of changes that affect the Riksbank's activities. Firstly, we Swedes are no longer making payments in the same way as before. Electronic payments are now crowding out cash. “To enable the general public to continue to have access to central bank money in the future, we at the Riksbank are investigating the possibility of introducing an e-krona, which would be issued parallel to physical cash,” explained Mr Ingves.
The financial system has become more integrated and risky
Secondly, the integration of the international financial markets means that the national financial market policy has less room for manoeuvre and greater difficulty in maintaining financial stability. “This means that greater cooperation is needed at supranational level. I therefore think that Sweden, with its large cross-border banks, should consider membership of the Banking Union,” said Mr Ingves.
Monetary policy needs to be flexible
Thirdly, the monetary policy tools need to be fit-for-purpose and flexible so that the Riksbank can carry out its tasks and manage the challenges that the changes to the financial system entail. This means that large bond purchases will probably play a larger role than before when we want to affect rate-setting and contribute to financial stability.
Government proposal for new Sveriges Riksbank Act is problematic
However, in the its proposal for a new Sveriges Riksbank Act, the Government has restricted the Riksbank's possibility to use its tools in a flexible manner. What is particularly problematic is the artificial division made between the Riksbank's core tasks: price stability and safeguarding the financial system. This division means that the Riksbank will not be able to act as quickly and powerfully in the next crisis as we have been able to do during the pandemic. The new act namely requires that we first determine what the main purpose of each measure would be, and means that the conditions and procedures differ, depending on the purpose.
Mr Ingves said that one other problems with the proposed act was that the new legislation does not comply with EU legislation, and that it is not clear how the Riksbank shall deal with questions where the national legislation is in conflict with EU legislation.
“The Government’s proposal will thus make it more difficult for the Riksbank in future to rapidly, flexibly and efficiently implement measures when needed – and this increases the risks to the Swedish economy. In my opinion, this is the wrong way to go, if politicians and citizens still want to have an independent central bank that can take powerful action using its entire balance sheet to stabilise the economy,” concluded Stefan Ingves.