Sweden: Riksbank holds unscheduled policy meeting; grants governor power to intervene in FX markets
January 2, 2016
At an extraordinary monetary policy meeting held on 2 January, the Executive board of the Riksbank decided to grant Governor Stefan Ingves and the First Deputy Governors the power to intervene swiftly in foreign exchange markets at any time in an effort to safeguard nascent gains in inflation that may be jeopardized by the strengthening krona. Prior to this meeting, any FX market intervention would require a convening of the executive board. This comes as the latest in a series of unorthodox policy measures employed by the Riksbank intended to boost anemic, and often negative, growth in consumer prices over the course of the past two years. The move was seen as controversial and is indicative of the Bank’s commitment to achieving its 2.0% inflation target. The Bank stated that it, “has no target for the exchange rate, but the krona's value in relation to other currencies is an important factor in the inflation forecast.”
Sweden’s headline inflation has managed to exceed 0.1% only once since October 2012, and that was in March 2015, when it reached a still-muted 0.2%. Low consumer price increases have been a thorn in the Riksbank’s side since mid-year 2011, when inflation began to fall. The Riksbank’s main objective is to maintain price stability as measured through headline CPI, at a target of 2.0%. The last time inflation was above 2.0% was in December 2012 when it came in at 2.3%. The inability of the Riksbank to reach its target over the course of the past two years has drawn criticism from some analysts, as some have begun to question the Bank’s ability to bolster inflation. Despite unorthodox monetary policy measures implemented by the Bank, including negative interest rates and unprecedented government bond buying programs in 2015, inflation has remained obstinately low.
As a result of these accommodative policy measures, Sweden has enjoyed strong growth. However, concerns have arisen as little progress has been made in achieving the Central Bank’s seemingly unrealistic inflation target of 2.0%. On the other hand, such a loose policy stance has been blamed for fomenting potential asset bubbles in the Swedish economy, particularly in the housing market. Soaring property prices, likely resulting from the low-interest-rate environment, have been acknowledged as a significant risk by the Riksbank, which has encouraged regulators to step in and cool the housing market. Interventions in the foreign exchange market could do more to shake confidence in the Banks’ ability to boost inflation, contrary to the intended result.
The Riksbank would likely only intervene should the currency begin to appreciate drastically to the point where it could compromise imported inflation, and not used to boost inflation otherwise. However, other measures of CPI are showing stronger gains. For example, headline inflation was 0.1% in December, however, when energy prices are excluded, the resulting inflation is 0.9%. Although the Riksbank has signaled that it is serious about achieving 2.0% headline inflation, some analysts find this target unrealistic and unlikely to be achieved any time soon. The Bank may find it beneficial to alter its inflation targeting regime to reflect this.
The Riksbank remarked that it, “maintains a high level of preparedness to take other monetary policy measures in addition to the currency interventions if this is necessary for inflation to stabilise around 2 per cent. The repo rate could be cut further, the securities purchases could be extended and the Riksbank could lend money to companies via the banks.” The next policy meeting is scheduled to be held on 11 February.
Author: Robert Hill, Economist