Skingsley: Adapting to new conditions - monetary policy freedom with responsibility

“The outbreak of the pandemic shows the importance of having room for manoeuvre. The freedom to choose our tools and implement them quickly has been an entirely decisive factor over the past year. Without this freedom, we would not have been able to help the economy as much.” These comments were made by First Deputy Governor of the Riksbank Cecilia Skingsley when she spoke today at SEB's digital webinar on the Riksbank's experiences during the pandemic.

Date: 20/05/2021 13:30

Speaker: First Deputy Governor Cecilia Skingsley

Place: SEB (digitally)

Independence is accompanied by the requirement of accountability - freedom with responsibility

“The conditions for monetary policy change over time and the tools therefore need to be updated in line with these changes, so that we retain the capacity to manage future crises,” continued Ms Skingsley. She went on to say that our strong independence entails freedom with responsibility, and that the Riksbank has over the years worked to increase openness with regard to monetary policy. It is no coincidence that the international trend of increased independence among central banks has gone hand in hand with increased transparency and clarity, said Ms Skingsley.

In recent years, we have had new challenges to deal with. Ms Skingsley pointed out that “our objectives and mandate remain unchanged, but our toolbox has needed to change.” During earlier periods we could see directly the effect of a 0.25 percentage points lower repo rate on the inflation forecast. But when the toolbox is larger, it becomes much more difficult to know how large the effect on target attainment will be. Our challenge now is therefore to become better at understanding, clarifying and explaining the effects of the new monetary policy tools so that we facilitate the democratic scrutiny of our work.

The importance of freedom of action was reinforced during the pandemic

The financial markets are constantly developing, as are companies’ means of obtaining funding. This means that the environment in which monetary policy is conducted also changes. During the pandemic, we have needed to implement many measures to hold interest rates low and to maintain the credit supply so that the real economy still functions. We have purchases government bonds, municipal bonds, covered bonds and commercial paper in the form of bonds and certificates. “I consider that the measures have functioned as we intended. We have been able to avoid a financial crisis,” observed Ms Skingsley.

If we are to continue supplying a monetary policy with price stability as objective, we need to accept that the conditions change and that the tools need to be updated in line with the changes. Independence is a large measure of confidence to hold in trust. Ms Skingsley concluded by saying “continued freedom with responsibility will enable the Riksbank to contribute to good economic developments going forward”.

Updated 20/05/2021