rfr · H30WRFR7 · 2016-01-19 00:00:00 — The initial pre-meeting is followed by a number of meetings at which new statistics and new events that have occurred since the previous Monetary Policy Meeting of are presented and discussed. Of particular importance for a small open economy such as , there is an international outlook meeting which develops preliminary forecasts of international variables such as economic growth and interest rates abroad upon which the forecast of developments in will be conditioned. Forecasts from bodies such as the Organization for Economic Cooperation and Development () and the () are also presented. There is also a financial market meeting and a meeting to ascertain the current state of the Swedish economy. Next, the Monetary Policy Department employs its structural “” model of the Swedish economy and statistical VAR methods to formulate its forecast of key macroeconomic variables in such as inflation, interest rates, GDP, unemployment, and exchange rates based on exogenous conditions such as the forecast for developments abroad. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 Following these introductory meetings, there is “the first large monetary policy group meeting,” whose purpose and Tägtström describe as follows: “The aim of the first large monetary policy group meeting is to attempt to clarify for what forecasts different models generate, how the models react to the new information that has become available and, not least, what assessments the management of the Monetary Policy Department made to arrive at the final forecast. At this meeting, the members of the Ex- ecutive Board also have the opportunity to ask the experts about details in the forecast” (p. The second half of the “second large monetary policy group meeting” held the next day is closed to all but , a small number of staff from the Monetary Policy Department, a few advisors, and representatives of the Communications Secretariat. As and Tägtström put it: “The reason for limiting participation in the second part of the meeting is to allow the members of to discuss the issues between themselves as thoroughly and as openly as possible. The members of the Ex- ecutive Board may now discuss and express opinions on the main scenario on the basis of their own assessments” (p. “…The various Board members present their views on the forecast. A member may, for example, express concern that the forecast for productivity is too high. If an alternative scenario for productivity has been drawn up the main scenario can be adjusted directly at the meeting by weighting the two scenarios for the growth of productivity together. can then immediately see what impact this has on the forecasts for the repo rate path, inflation and, for example, the growth of GDP. Various repo rate paths that reflect different balances between inflation and the development of the real economy are also presented” (p. “On the basis of this material, attempts to arrive at a repo rate path that it seems likely that the majority of the Board members can support. At this point the Board members decide that they want to see additional alternative scenarios, or another repo rate path than the one that has served as the main scenario until this time. If so, these are produced by the next day when a follow-up meeting is held with and some of the personnel of the Monetary Policy Department” (p. Working closely with , the Monetary Policy Department then prepares the draft which, in the assessment of the Monetary Policy Department, will gain the support of the majority of the members of . The Report contains the main scenario and alternative forecasts for consideration at the Monetary Policy Meeting of at which the repo rate and other monetary policy decisions are taken by majority vote. The Monetary Policy Meeting begins with a brief update on how financial markets have developed, including market expectations of monetary policy 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 ahead of the meeting. This is followed by a brief summary of the main ele- ments of the . Much of the material and reasoning underlying the decision-making process is already built into the Monetary Pol- So the heart of the Monetary Policy Meeting is the presentation by members of individual views. sent their individual views on the current stance of monetary policy and any proposals they choose to make for immediate repo policy action and its pub- intended future path, or other policy actions the Riksbank may take. The main scenario in the --which includes the cur- rent repo action and the published intended repo rate path, as well as forecasts for the main macro variables in , and the domestic and global condi- tioning variables-- serves naturally as a basis against which individual mem- bers debate monetary policy. Members can productively express the reasoning underlying their own support of the main scenario or they can challenge the majority by entering reservations against elements of the main scenario and advancing their own proposals. and Tägtström emphasize that: “has chosen to organize as an individualistic commit- This means that the decisions are made jointly, but that each member has an individual responsibility. The interest rate decisions are made by means of a majority vote and the Chairperson of has the casting The minutes that are published approximately two weeks after the mon- etary policy meetings provide a record of how each of the members reasoned Once the minutes have been published, the members may express their own views publicly, which highlights the members' individual responsi- bility and also makes it easier to evaluate monetary policy” (p. 5.3 Evolution of Monetary Policy in 2010- 2015: The Narrative in Real Time We tell the story of how monetary policy in evolved from 2010 to late 2015 as it was experienced by and in real time. The sources for this are the Monetary Policy Reports (or Updates) prepared for each Monetary Policy Meeting and the record of each policy meeting transcribed in “Minutes of 's Monetary Policy Meetings”. The Reports (prepared for the February, /, and October meetings) usually contain between 50 and 70 pages and include the main forecast scenario corresponding to the Board's policy decision, as well as alternative scenarios and occasionally special articles relevant for policy. Updates (prepared for the April, , and meetings) usually contain less than 20 pages and present only the main forecast scenario corresponding to the policy decision. Reports and Updates both include tables at the back with annual average forecasts of variables in the main scenario for the three-year forecast horizon. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 also describe new information received since the previous Monetary Policy Meeting. There were 35 Monetary Policy Meetings during the period from February 2010 to October 2015, 6 each year and 5 in 2015 at the time of writing. In other words, our narrative is based on some 1200 or so pages of Reports and Updates, and 800 or so pages of Minutes--around 2000 or so pages of real-time data, forecasts, analysis, discussion, and monetary policy decision-making (see also Table 2 and 2). Our narrative is necessarily highly selective, and we discuss only those elements of the history needed to evaluate how well monetary policy was carried out “meeting by meeting” taking into account the information available at the time. We take note of significant forecast revisions (conditioned on current policy actions in the main scenario) compared to the previous meeting's forecasts. We explain the policy action(s) taken. And we report the essence of 's justification for its policy action. That justification comes primarily from the Monetary Policy Reports and Updates, which largely reflect the views of the majority of in favour of the current policy decision. As emphasized in Section 5.2 above, Monetary Policy Meetings provide a way for members to explain their individual perspectives on the policy decision and the Minutes provide individual members with a format as transparent and nearly as immediate as the Report or Update to explain their views. Dissenters have an especially strong incentive to express their views at the Monetary Policy Meetings for publication in the Minutes, since the majority point of view is already well represented in the Report or Update, and alternative scenarios and forecasts may not adequately capture concerns of dissenters and are not included in Updates at all. Often the most interesting commentary in the Minutes involves statements by dissenters that challenge the majority assessment and policy decision or question directly members of the majority about their individual policy positions. Dissenter commentary in the Minutes may seem excessive, repetitive, or strident at times. But, as emphasized in Section 5.2, the Riksbank asks members to take individual responsibility for monetary-policy making, and provides members and especially dissenters with opportunity to do so at Meetings and through published Minutes with attribution. It is particularly important for our evaluation of monetary policy to report dissenting views at length in order to ascertain the extent to which monetary policy could have been improved had dissenting recommendations been adopted at the time. We have characterised monetary policy during the Review period in six phases (see also Figure 9): 1.Recovery and tightening, February 2010-July 2011. 2.Pause for thought, September 2011-October 2011. 3.Disappointment and easing, . 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 Another pause for thought, February 2013-October 2013. Going to zero, . Going negative, February 2015-October 2015. Phase 1: Recovery and tightening, February 2010 – 2011 The beginning of 2010 saw an important change on monetary policy in , with the first steps to tighten policy after the extraordinarily monetary stimulus following the global financial crisis. Since 2009 had left the repo rate at its post-crisis low, and left unchanged its published expected future path of the repo rate which implied a lift-off in the second half of 2010, reaching a repo rate in early 2012 and around in early 2013. In the main scenario at its February 2010 Monetary Policy Meeting the forecast for unemployment in 2010 was revised down substantially from to compared to the forecast at the meeting. It was expected to be around in 2012, the last year of the threeyear forecast horizon. The forecast for CPIF inflation in 2010 was revised up from to , after running at in 2009, and was forecast to be in 2012. voted in February 2010 for the first time since the crisis to tighten monetary policy somewhat (see Table 2). decided to keep the repo rate at but to publish a future repo rate path with lift-off beginning in summer or early autumn of 2010. justified the slight tightening of monetary policy saying: “…the repo rate may need to be raised somewhat sooner than was assessed in … This is due to new information taking the form of a slightly higher international growth rate, stronger employment and higher inflation, among other developments, but also due to the improved functioning of the financial markets” ((MPR), pp. Market expected repo rates conformed closely to the Riksbank repo rate path to mid- 2011, then rose more slowly to only in early 2013 (MPR, p. entered a reservation against the majority decision and advocated instead cutting the repo rate to and the repo rate path by below that in the main scenario until the end of the fourth quarter of 2010. In so doing, extended his consecutive series of dissents for easier policy begun in . He had argued for cutting the repo rate by instead of in , and in 2009 he wanted to cut the repo rate to instead of . reasoned much as he had in previous meetings. Comparing the forecasts for inflation and resource utilization with the corresponding repo rate paths outlined at the end of Chapter 2 of the February 2010 MPR, he pointed out that “[i]t is clear from these figures that the lower repo rate path provides a much better outcome for both inflation and resource utilization” (Minutes, p. As the majority moved to tighten policy 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 somewhat, complained that “[o]ne might think that if one nevertheless does not choose the low repo rate path one must have very strong reasons for this…Unfortunately, it is not made clear in the draft Monetary Policy Re- port why it is right to prioritize something other than the inflation target and resource utilization in the current situation” (Minutes, pp. proceeded to criticise the draft MPR for stating “Whether or not the repo rate levels set in these scenarios would lead to a better or worse development of the economy than that portrayed in the main scenario is not a simple question to answer”. According to , “What it should say instead is: ‘Whether or not the repo rate levels set in these scenarios would lead to a better or worse development of the economy than that portrayed in the main scenario is a very simple question to answer. The lower repo rate path provides a better development, while the higher provides a worse’” (Minutes, p. Responding to the reasons given for such uncertainty in the MPR argues in the following paragraphs in the Minutes that i) all measures of resource utilization give the same answer, ii) he doesn't know of any information pointing to economic agents acting differently or paradoxically when interest rates are low, iii) there are still no signs that low interest rates have entailed any problems with regard to financial stability or the functioning of financial markets, and iv) according to evidence in the Riksbank's recent Fi- nancial Stability Report and , the ”unequivocal and certain conclusion based on very detailed data, studies and stress tests is that the housing market and credit granting do not at present entail any problem for financial stability” (Minutes, p. Concluding that the draft MPR gives no good reasons for not choosing the lower repo rate path, asks “Is there some unspoken motive? However, unspoken motives have no place in transparent monetary policy. Anything that cannot be expressed openly cannot be a good reason” (Minutes, p. criticized 's reasoning regarding the comparison between different repo rate paths in the MPR saying that “she considered the reasoning in the Report that there may be consequences of different interest rate paths that are not captured in the analysis to be good. members may have different opinions regarding the probability of these consequences and the significance they have for the outcome, but ultimately it is a question of different assessments” (Minutes, p. Later, added that “the factors which the other members believe affect the expected outcome in different alternative actions should be incorporated into the actual forecast…At the same time, must make decisions on monetary policy now, and then the members must be free to weigh in the factors they believe have relevance for the future developments, even if these cannot be explicitly considered in the forecast” (Minutes, p. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 was sympathetic with 's policy position, but she sided with the majority in thinking that “there is a risk that expectations could be affected over a period of time to come, if the central bank cuts the policy rate during an economic upturn, as this would be a clear breach of earlier pat- terns,” adding that “developments in the housing market, with high growth in household credit and higher house prices mean that it is inappropriate to cut the interest rate” (Minutes, p. ’s argument that a lower repo rate path would yield a better balanced monetary policy than the one in the main scenario, since the lower repo rate path brings inflation closer to target and brings down unemployment relative to its sustainable level over the 3-year forecast horizon, had some plausibility. But the problem was that it was en- tirely based on simulations from the model. As pointed out, indi- vidual Board members are and should be free to base their choice of repo rate path on considerations other than those in the model forecast alone, bringing their own perspectives to the repo rate decision as independent Board mem- Later in the meeting, reminded the majority that “[t]he repo rate path had a very low credibility in April and 2009, and market expec- tations were far above the announced repo rate path. However,… the Riks- bank has gradually succeeded in improving the credibility of the path. rate expectations have gradually shifted downwards and come closer to the Riksbank's repo rate path. feared that the upward shift at the beginning of the forecast interval could now be perceived as a fairly large change in monetary policy which increases the probability of future upward shifts in the repo rate path. This could result in a large upward shift in repo rate expectations, a loss of the credibility the Riksbank had struggled to attain and in reality a much more contractionary monetary policy than intended” (Minutes, p. The relationship between the published repo rate path and market expectations was to become an important question over the years that Compared with the February outlook, forecast revisions in the main sce- nario for and abroad were mixed at the Monetary Policy GDP growth in the euro area and in for 2010 was revised But unemployment in in 2010 was also revised down to and forecast to average in 2012. In the light of that , left the current repo rate and the forecast for the repo rate unchanged in April. agreed with the majority to hold the repo rate at . instead of lifting off sometime between and as the majority expected, insisted on a main scenario in which the first rate rise would come in . Although the immediate policy differences had narrowed at this meeting, many of the concerns and issues considered at the February meeting were taken up again. 's dissent was again based on a favourable comparison of his alternative with the main scenario. He presented his own charts of his preferred 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 alternative path for repo rates at the meeting, since they were not contained in the Monetary Policy Update. He also argued for presenting alternative repo rate paths and accompanying scenarios in the Updates as well as in the Re- ports. drew attention to the fact that the market's expected repo rate path was now below the Riksbank's repo rate path saying “there is a discrepancy between market pricing and the Riksbank's repo rate path,” with the former implying a more expansionary monetary policy than the forecast. “claimed that this could lead to an actual monetary policy that was clearly more expansionary and thus less well-balanced than that proposed in the draft Monetary Policy Update” (Minutes, p. “…considered that 's comments on the difference between market expectations and the repo rate path, where market expectations further ahead were much lower than the Riksbank's repo rate path, were interesting. This means that the market is expecting much more expansionary monetary policy than the Riksbank has announced. felt that this difference should be processed and discussed properly prior to the next monetary policy meeting… But on this occasion he would not be surprised if a slower rise in the repo rate would prove to be more reasonable” (Minutes, p. Earlier in the meeting, had acknowledged the problem for making and interpreting forecasts of inflation and the economy when the published repo rate path appeared to lack credibility because it diverged from market implicit forward rates. supported 's call “for a thorough analysis of what the outcome would be for different decisions, given the way that interest rate expectations are affected. She agreed that such an analysis would be very useful. However, must make a decision on the repo rate now, based on the material that is available now” (Minutes, p. GDP grew at a surprisingly strong annualised rate in the first quarter of 2010, and at the 2010 Monetary Policy Meeting Swedish GDP was expected to grow by over 2010 as a whole, more than forecast in the Monetary Policy Update in April. One reason was the strength of exports, now forecast to grow in 2010 by up from in April, stimulated by the recovery abroad. Unemployment was forecast to fall from in 2010 to in 2012. CPIF inflation was running at in 2010, but continued underutilization of resources was expected to push CPIF inflation down to by 2012. decided to raise the repo rate for the first time since the crisis by to and to steepen the near-term published repo rate path somewhat while normalizing the repo rate at rather than . Market expected repo rates now conformed to the Riksbank repo rate path only to early 2011 and then rose to about in mid-2013. justified its policy tightening saying: 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 “Developments in the labour market and the high GDP growth indicate that the recovery is on solid ground. This, together with other indicators, points to resource utilization now being higher than was assumed in the April Monetary Moreover, house prices are rising relatively quickly and house- hold indebtedness has increased substantially in recent years” (MPR, p. dissented against the decision, preferring instead to delay the repo rate increase until and then to follow the profile for the repo rate in the main scenario, in view of the increased uncertainty prevailing as regards the problems in the euro area. again dissented, preferring to keep the repo rate at through the fourth quarter of 2010, and thereafter a gradual return to the repo rate path of the main scenario. During the discussion, pointed out that the market expected repo rate five years ahead was only , which he thought was unrealistically low. He pointed out that “[m]arket expectations are now lower than the repo rate path and the difference is moreover unusually large. This implies that mone- tary policy is in practice much more expansionary than is intended in the draft When the repo rate path expected by the market is used in the Riksbank's models, the results show that it leads to a very strong growth in GDP and to an underlying inflation rate that far overshoots the tar- This is not good, of course” (Minutes, p. In arguing for his preferred alternative policy, emphasized that had, after extensive discussions, agreed on a new version of the document “Monetary Policy in ,” which would be sum- marized at the beginning of the Monetary Policy Reports. second point of the summary for how the Riksbank conducts “flexible inflation Arguing that a reasonable equilibrium unemployment rate can be assessed to be in the interval of 6 to 7 per cent, he then presented model fore- cast simulations showing that his preferred alternative repo rate path led to somewhat better outcomes for inflation and unemployment over the three-year The problem for members of the Board other than was this: CPIF inflation would according to the forecast undershoot the inflation target by or so for most of the forecast period, and unemployment was forecast to remain above the 6 to 7 per cent sustainable rate of unemployment. If one absolutely believed the forecasts in the main scenario, then son's argument made sense. Yet, actual CPIF inflation had been running con- sistently at the inflation target in 2010, and other Board members were all sensitive to the need to balance continued highly expansionary policy against the possibility that exceptionally low interest rates over a long period of time would lead to excessive indebtedness among households, abnormally high house prices, and financial fragility in the future. The draft included an article “Effects of a Fall in House Prices,” pp. 49-52, that attempted to estimate how a fall in house prices could affect developments in the macroeconomy.