Erik Thedéen: My view of monetary policy

Mr Thedéen began his speech by commenting on the recent banking unease that arose after a couple of US niche banks recently faced liquidity problems and collapsed, which was followed by problems in Swiss bank Credit Suisse.

“Although the situation has become a little calmer, there is underlying concern that the problems will spread to other banks and further into the financial system. I think it is necessary to have a sensible but also sensitive attitude towards the risks. At the moment, the likelihood of an international financial crisis seems slight, and so does the likelihood of contagion effects to Sweden. There is a major difference between the banks that have been affected and the Swedish banks, which have high profitability, good liquidity and relatively large capital buffers. However, the financial system is closely interwoven at a global level, and there is every reason to be vigilant.”

He went on to note that the inflation figures he is now seeing as newly appointed Governor are the same as he saw as a new Economics graduate, during his first job at the Riksbank in 1990. However, the reasons for the high inflation then and now differ and, according to Mr Thedéen, the conditions for addressing the situation are much better today.

“One important reason for this is the reforms in wage formation and the economic policy frameworks that Sweden implemented in the mid-1990s. The inflation target and the transition to an independent central bank with a strong mandate to maintain that target were part of this. Since then, the inflation target and a monetary policy that independently steers towards this target have been a cornerstone of economic policy in Sweden. This is also reflected in the new Sveriges Riksbank Act, which applies from the start of this year.”

Mr Thedéen then highlighted the danger of inflation becoming entrenched at a high level and said that the longer inflation overshoots the target, the greater the risk that households and companies will become more inclined to focus on what inflation has been and that they will adjust their expectations accordingly. It will then become more difficult to plan and to make financial decisions, which will lead to poorer functioning of the economy. Low inflation instead creates the conditions for an environment where inflation does not become a factor that people are worried about or that they need to think about when making everyday financial decisions.

“Inflation needs to come down significantly this year. Our assessment in February was that higher interest rates are needed to stabilise inflation at the target within a reasonable period of time. At the same time, this entails a cost for many households.”

At the same time, he pointed out that long-term high inflation is considerably more expensive for households and for an average household price increases have undermined their spending power more than interest rate increases. CPIF inflation excluding energy was significantly above the Riksbank's latest assessment in February, and there is no doubt that monetary policy must therefore remain tight.

“However, the unease linked to the problems in international banks can also have a cooling effect on the economy, for example if interest rates met by companies start to rise, conditions for loans are tightened, asset prices fall and credit volumes decline. Prior to our next decision at the end of April, we will have received more information on economic developments, including a new outcome for inflation. As always, we will weigh up all the information and make a new overall assessment for our next decision. The inflation target is the Riksbank's overriding objective and we will do what is necessary to bring inflation back to low and stable levels,” concluded Erik Thedéen.