Riksbank Successfully Fights Inflation, Debt (and Employment)
Good news from Sweden in the Riksbank’s February 2013 minutes:
The assessment of a majority of four of the Board members was that letting the repo remain at 1 per cent during the year ahead would enable inflation to reach the target of 2 per cent after just over a year and resource utilisation to normalise. They did not believe that a slightly lower repo rate would alter this assessment in any decisive way. They also regarded the chosen repo-rate path as appropriate considering that the risks that the high level of household indebtedness poses to economic development in the long term still remain.
The Riksbank is fighting the Swedish household debt bubble – excellent news! Right, everybody? Debt is really, really bad for you. A bit like inflation.
What does Lars Svensson think about this monetary policy regime?
Deputy Governor Lars E.O. Svensson began by stating that in order to assess which monetary policy should be conducted it is important to view monetary policy in a broader context. He claimed that what we have been witnessing for some time now is a clear and serious failure of monetary policy. His first point in support of this claim was that CPIF inflation was close to the target of 2 per cent in 2010 but that since then it has steadily trended downwards to arrive at or below 1 per cent in 2012. At the same time, unemployment is now high and rising, and far above a long-run sustainable rate. He wondered what happened in 2010 that can explain the fall in CPIF inflation. From and including the monetary policy meeting in June 2010, the majority on the Executive Board steadily raised the repo rate at every monetary policy meeting, from 0.25 in June 2010 to 2 per cent in July 2011, an increase of 1.75 percentage points.
“a clear and serious failure of monetary policy” … “He wondered what happened in 2010 that can explain the fall in CPIF inflation” … OUCH!
I do not wish to further enhance the cult of the central banker. But when somebody sticks their neck this far out, attacking the incoherence of their colleagues’ arguments to their faces… with reason, theory, and history all on side… there is a word we can use to describe this behaviour – heroic. Lars Svensson and Karolina Ekholm – I salute you both for fighting the hawks.