rfr · H30WRFR7 · 2016-01-19 00:00:00 — pointed out that “has a poorly functioning housing market, where rent regulations, tax deductions on mortgage interest and regulations regarding land-use planning create major distortions. Housing construction has been extremely low for 20 years and this has led to a significant housing shortage in most growth regions. Moreover, the percentage of households that own their own home has increased rather substantially, probably as a result of the strong incentives to convert rental properties to tenant-owned properties in metropolitan regions...[T]his development is not something monetary policy can influence.…Monetary policy risks losing credibility, at the same time as household debt merely continues to increase” (Minutes, p. explained the concern at the heart of the majority decision: “A new feature in the forecast presented now is that housing prices are picking up again. A reasonable increase in housing prices is, of course, not a problem but what may be a cause for concern is if there is once again a bal- ance-sheet-build-up in which housing prices and household indebtedness increase in a mutually reinforcing process. Such a process would be particularly dangerous if it encompasses unrealistic expectations on the part of the households about the future development of interest rates or housing prices. It is therefore important to prevent this from happening…It is clear that the Riksbank and monetary policy have a role to play in this context, but that other Swedish authorities and agents also need to take responsibility” (Minutes, p. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 sided with the majority, but she “pointed out that she would probably have reached a different conclusion if it were not the case that monetary policy was already very expansionary and the effects of earlier repo- rate cuts from 2 to 1 per cent could not be seen” (Minutes, p. also believed that the majority repo rate path represented a well-balanced com- “By letting it take a longer for inflation to reach 2 per cent, the Riksbank can continue to make a contribution towards dampening the risks associated with household indebtedness...The fundamental thing is that the monetary policy is highly expansionary at present and will remain so in the This underlines the fact that the Riksbank is giving priority to its inflation target and to attaining this target within a reasonable period of time” (Minutes, p. presented a counterfactual analysis of what would have hap- pened if the Riksbank had kept the repo rate at since 2010, showing that CPIF inflation in would have been and unemployment (Minutes, p. Later pointed out, correctly, that “none of the members of advocated this alternative when the decisions were actually made…” He noted that “the minority had also voted for gradual increases in the repo rate, although with a certain time lag in relation to the majority at the time” (Minutes, p. At the 2013 Monetary Policy Meeting, GDP growth in the euro area was forecast to slow a more to -in 2013 and export growth in Swe- den was expected to slow in 2013 from to -. But the forecast for private consumption in was revised up from to in 2013. The GDP growth forecast for 2013 was changed at . was forecast to slow a more to in 2013 and rise to in 2015; and unemployment was revised up to in 2013 and was forecast to average in 2015, revised up from in April. Notably, household debt as a percentage of disposable income was 171 per cent in the first quarter of 2013, considerably lower than forecast in April, as disposable incomes grew faster and debts grew more slowly than expected. decided to retain the monetary policy decision from April -- it kept the repo rate at and published essentially the same repo rate path as in April, the repo rate at for about a year and then increas- ing the rate gradually to at the end of the three-year forecast horizon. Money markets expected the repo rate to be held at in 2013 and then rise gradually to in 2015, about 50 basis points higher than in April (MPR, 's reasoning underlying the policy decision was largely the same as in April, although stated more clearly. again dissented against the decision to maintain the repo rate at and against the repo rate path as she had done in April, advocating a repo rate and a repo rate path at through Q2 2014 rising now to 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 , who joined in , dissented against the decision to maintain the repo rate at and against the path, advocating a repo rate to be maintained until Q2 2014 after which it would follow the repo rate path in the policy decision. The discussion and debate at the meeting followed largely along the lines of the previous meeting. There was one new notable concern. pointed out that there were signs that the credibility of the inflation target and monetary policy was beginning to be questioned. observed that “[i]nflation expectations in the Prospera surveys and the surveys of have fallen significantly in recent years, as shown in Figures 3:29 and 3:30 in the draft ”. He also noted that “in the Prospera survey of the inflation expectations of money-market players, the social partners and purchasing managers two years ahead, which was conducted in this year, only 8 per cent of the over 200 respondents believed that the rate of inflation would be as high or higher than the level in the Riksbank's forecast. The average expectation was one percentage point below the Riksbank's forecast” (Minutes, p. At the Monetary Policy Meeting euro area GDP growth in 2013 was revised up slightly to -compared to . But Swedish export growth for 2013 was revised down from -to -, growth of private consumption in 2013 was revised down for 2013 from to , and Swedish GDP was expected to grow in 2013, down from in . There was change in inflation or unemployment projections relative to . decided to retain the monetary policy decision from April and -- it kept the repo rate at and published essentially the same repo rate path as in , the repo rate at for about a year and then increasing the rate gradually to at the end of the three-year forecast horizon. The reasoning underlying 's decision was much as in except for the following paragraph welcoming the new framework presented by the Government for macro-prudential policy: “The Riksbank has long called for a clearer framework and new tools to prevent and manage risks linked to financial imbalances, such as households' high indebtedness. The Riksbank therefore welcomes the Government's proposal, with new measures for a stricter framework to reinforce financial stability. will receive more tools, the foreign currency reserve will receive stronger funding, and a formal financial stability council will be established. This clarifies the allocation of responsibility and gives better conditions for taking further measures to reduce risks linked to households' high indebtedness” (MPU, p. again dissented against the decision to maintain the repo rate at and against the repo rate path as she had done in April and , advocating a repo rate and a repo rate path at through Q2 2014 rising now to by mid-2016. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 dissented against the decision to maintain the repo rate at and against the path, as he had done in , advocating a repo rate to be maintained until Q2 2014 after which it follows the repo rate path in the Although there was a discussion of the Government's proposal on macro- policy, Board members understood that further discussion would have to await a more concrete specification of the proposal and the powers that the new might be given. Few aspects of the main scenario were revised at the October 2013 Mon- etary Policy Meeting compared with . GDP growth in for 2013 was revised down from to but with GDP still expected to grow at and in 2014 and 2015, respectively. expected to be in 2013, forecast to be in 2014, and still expected to attain in 2016; unemployment was forecast to fall back from in 2013 to by 2016. Household debt was now as a percentage of disposa- ble income, having fallen contrary to the forecast mentioned above from ; but the ratio of household debt to disposable income was again forecast to rise, to by the end of 2016 (MPR, p. Once more, decided to retain the same monetary pol- icy decision from April, , and --it kept the repo rate at and published essentially the same repo rate path as in , the repo rate at until late 2014 and then increasing the rate gradually to just Market expectations of the repo rate path followed a lower trajectory than the Riksbank's published path after early 2015, ending about one percent- age point lower by the end of 2016; although the Prospera survey to mid-2015 conformed more closely to the Riksbank's repo rate path. The reasons given in the for 's policy decision were essentially identical to those given in previous recent again dissented against the decision to maintain the repo rate at and against the repo rate path as she had done in April, , and Sep- tember, advocating a repo rate and a repo rate path at through Q3 2014 rising now to by mid-2016. dissented against the decision to maintain the repo rate at and against the path, as he had done in and , advocating a repo rate to be maintained until Q3 2014 with it rising rapidly thereafter to converge to the repo rate path in the main scenario. Monetary policy had essentially been in a holding pattern since April and the discussion at the monetary policy meeting covered much the same ground as previous meetings with more discussion of the Government's proposal on Among the main points raised were the following. noted that in April “a rather significant downward revision of the inflation forecast was made but the repo rate was not lowered, only the repo-rate path further ahead. In , a downward revision of the household 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 debt ratio was not followed by a lowering of the repo rate…A natural interpretation of the failure to lower the repo rate when forecast revisions are made that justify a marginally lower repo rate is that household indebtedness is perceived as a problem that lays a kind of floor for the repo rate…” (Minutes, p. observed: “How much scope there is to allow monetary policy to take other factors into account depends on the credibility of the inflation target and of monetary policy…He was concerned about what will happen to this credibility in the period ahead if inflation does not soon rise towards the target” (Minutes, p. Governor Ingves “reached the conclusion that until these [macro-pruden- tial] measures are in place and are deemed to have started to have an effect, the repo rate will have to be higher than it would otherwise” (Minutes, p. He thought “the interest rate path was well balanced given the Swedish economic and inflation forecasts. As he noted earlier, redundancy notices are down at levels usually prevailing in good times. Even so, unemployment is high, which largely seems to be due to structural factors. Matching between jobseekers and vacant jobs has deteriorated recently. The labour force also consists to greater degree of groups that are further from the labour market than previously. Against this background, he drew the conclusion that this is largely a matter of structural problems on the labour market that monetary policy cannot fix” (Minutes, p. Phase 5: Going to Zero, In the main scenario, forecasts of real variables in and abroad were modified at the Monetary Policy Meeting compared with October. However, 2014 inflation in the euro area was revised down from to ; and the ECB increasingly communicated its intention to sustain monetary ease, if needed, with unconventional measures. important, the CPIF inflation forecast in was revised down again--from to for 2013, from to for 2014, and from to for 2015 before rising to in 2016. In particular, in the months immediately ahead, CPIF inflation was expected to be just over 0.5 per cent, well below the previous assessment. Household debt as a percentage of disposable income was still forecast to rise 6 percentage points to 178 by 2016. decided to cut the repo rate to until the beginning of 2015 and then raise it gradually to by the end of 2016. The aggressive easing action -- amounting to a 25 basis point parallel downward shift of the repo rate and entire future repo rate path -- strongly signalled the Riksbank's intention to address the low inflation problem. justified its policy action saying: “The monetary policy considerations have for some time concerned balancing how quickly inflation will approach the target with a lower interest rate against the increased risks linked to households' high indebtedness. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 has been low for a long time, and the unexpectedly low outcomes in recent months regarding in particular services prices imply that it may take longer for inflation to rise. Without a more expansionary monetary policy, there is a risk that inflation would not reach 2 per cent in the coming years” (MPU, p. Remarkably, decision was unanimous for the first time since February 2009. The unanimity was another strong signal of the Riksbank's intention to address the low inflation problem. admitted that “this was probably the most difficult repo-rate decision he had been involved in during his time as a member of the Riksbank's ,” which he joined in January 2012. He observed that “[w]ith regard to economic and the risks associated with household debt, has happened since the most recent monetary policy meeting on 23 October. This suggests that one should hold onto the monetary policy plan from October and thus leave the repo rate unchanged at today's meeting” went on to explain why he had come to favour decisive policy action against low inflation: “But at the same time, inflation has been much lower than expected for two months in a row, compared with the forecast in October. Of course, individual outcomes should not overthrow a monetary policy plan spanning over several years. But in the present situation, where inflation has already been below target for around two years and is not expected to reach the target until autumn , the level of tolerance for further negative inflation surprises is very limited…it is simply the case that there has been a shift in the form of a higher price tag on taking into account the risks linked to household debt” (Minutes, p. continued explaining why he was particularly concerned about the surprisingly low inflation outturns: “One circumstance that increases concern over the unexpectedly low inflation is that the main cause of the forecasting error is a weak development in prices of services. This is worrying for several reasons. Firstly, developments in prices of services should have a stronger link to the domestic economic situation than developments in prices of goods. An unexpectedly weak development in prices of services can thus indicate that companies are finding it even more difficult to pass on domestic cost increases to prices than the Riksbank is assuming. It should be noted in this context that the difficulties in passing on cost increases to prices were an important reason for revising down the inflation forecast as early as April this year. Secondly, with this, total inflation is more dependent on developments in prices of goods. However these have shown a tendency towards a weak trend over a longer period of time, which makes it less probable that they can compensate for a continuing weak development in prices of services…[A]ll this indicates there is a risk of the unexpectedly low inflation in recent months becoming entrenched and worryingly delaying the expected rise in inflation towards the target” (Minutes, p. Governor Ingves showed enthusiasm for the policy proposal in his comments, concluding flatly that his “overall assessment led him to support 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 the proposal to cut the repo rate to 0.75 per cent and the proposed repo-rate path” (Minutes, p. Forecasts in the main scenario were revised relatively at the February 2014 Monetary Policy Meeting compared to . decided to keep the repo rate at until the beginning of 2015 and then raise it gradually to by early 2017, essentially the same monetary policy stance as . Market repo-rate expectations changed from . justified the policy action saying: “New information received since confirms the picture that inflationary pressures are low, even though economic activity is now strengthening. The low inflationary pressures justify continued expansionary monetary policy. At the same time, household debt as a share of income is expected to rise somewhat more in this forecast than was expected in ” (MPR, pp. For the second consecutive Monetary Policy Meeting decision was unanimous. The discussion at the meeting covered many of the same issues as at earlier meetings and broke new ground. Economic abroad were changed in the main scenario at the Monetary Policy Meeting compared with February. Average GDP growth in over the forecast horizon was changed. Productivity growth for 2014 was revised up from to ; the growth of unit labour costs in 2014 was revised down from to . Most notably, CPIF inflation was lower than expected for the months of January and February at only a annual rate, and CPIF inflation for 2014 was revised down from to . CPIF inflation was still forecast to rise to by 2016, as the unemployment rate was to fall from in 2014 down to in 2016. Household debt as a percentage of disposable income was still forecast to rise, from around to by 2016. decided to keep the repo rate unchanged at for about one year and then raise it gradually to by 2016. justified its policy action saying that “[i]n light of the weaker inflation forecasts, adjusted down the repo rate path to reflect the greater probability of a repo-rate cut in the near term compared with the assessment in February” (MPU, p. dissented against the decision to maintain the repo rate and against the repo rate path, advocating cutting the repo rate to for about one year and then raising it gradually to by 2016. justified her dissent saying her preferred policy was associated with a higher forecast of CPIF inflation and a lower forecast of unemployment over the forecast horizon and a better-balanced monetary policy. also dissented against the repo rate and the repo rate path, preferring instead to cut the repo rate to for about one year and then raise it towards the policy path in the main scenario. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 saying his preferred repo rate path would entail a forecast that returns CPIF inflation to more quickly. The discussion and debate at the meeting focused again on how much mon- etary policy should take account of the ratio of households' debt to disposable income when the inflation rate was far below the target. “felt that this meeting was the closest he had come to a repo- rate cut without actually voting for one. Another way of expressing it [he said] is that his own tolerance for further downward revisions of inflation in the near term has now reached its lower bound” (Minutes, p. Later, responded to the fact pointed out by and Mr Flodén that the Riksbank's forecasts for inflation were slightly above the as- sessments made by other forecasters. admitted that “although this appears to be the case in general, it was unclear to him what conclusions should be drawn from this”. Referencing the Account of Monetary Policy 2013 (chap- ter 4 and the appendix), continued that “the Riksbank does not on average produce poorer forecasts of CPIF inflation than other forecasters and it is thus not necessarily the case that other forecasts provide a better guide than the Riksbank's own forecasts”. He “pointed out that the analyses of the relation between inflation on the one hand and import prices and unit labour costs on the other have shown that inflation has been unexpectedly low for some time now. It is therefore not unreasonable to believe that companies have accumulated a relatively substantial need to increase their prices in the period ahead…[he] did not consider that the argument that other forecasters make lower inflation forecasts than the Riksbank is a particularly strong reason for a further downward revision of the inflation assessment” (Minutes, p. responded that the Riksbank's inflation forecast was partly based on the assumption that the high rate of productivity growth during Q4 2013 would be temporary; and that an alternative hypothesis was that higher productivity growth was more persistent and would lead to more persistent downward pressure on unit labour costs and inflation. She argued that a repo rate path should deliver relatively well-balanced monetary policy under differ- ent assumptions about uncertain preconditions. Her repo rate path delivered expected inflation of about at the end of the three-year forecast horizon with the Riksbank's productivity assumption, but nearly inflation if the productivity growth persisted (Minutes, p. A range of important forecasts in the main scenario were revised at the 2014 Monetary Policy Meeting. In particular, euro area GDP growth for 2014 was revised down from to and euro area inflation for 2014 was re- vised down from to . Furthermore, the ECB had taken extraordinary steps, including cutting its deposit rate to -(meaning that banks would pay to deposit liquidity with the central bank), to support its declaration that policy rates would be exceptionally low for an extended period. expectations of euro policy rates fell by as much as 50 basis points to near zero in 2016 and mid-2017. Swedish GDP for 2014 was revised down somewhat from to but expected to bounce back to growth in 2015. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 importantly, CPIF inflation was revised down again -- for 2014 from to and for 2015 from to , but still expected to reach in 2016. decided to cut the repo rate by 0.5 percentage points to , to keep it there until the end of 2015, and then raise it gradually to around in mid-2017. Market repo rate expectations fell sharply this time and conformed reasonably well to the published Riksbank repo rate path through the end of 2016, but rose to only by mid-2017. justified the aggressive easing of monetary policy in the saying: “As inflation has been low for some time, and as it is important that inflation expectations should remain anchored around the target of 2 per cent, it is particularly important that inflation should begin to rise towards the target level…A lower repo rate also contributes to counteracting the effects of a stronger krona and lower import prices, which could result from lower international policy rates…[t]he expansionary monetary policy can contribute to inflation expectations remaining anchored around 2 per cent by sending a clear signal that monetary policy will ensure that inflation approaches the inflation target within a reasonably near future” (MPR, pp. Governor Ingves and dissented against the decision to cut the repo rate by 50 basis points and against the repo rate path, advocating instead cutting the repo rate to only , it there until 2016, and slowly raising it thereafter. This meeting was extraordinary not only because monetary policy was eased so aggressively and credibly according to market repo rate expectations, but also because broke so decisively with its reluctance to cut rates sharply in the face of low inflation, and also because the Board majority broke with the Governor to do it. The two pivotal Board members at the meeting were and . , who joined the Board in 2013, led-off the meeting declaring that since “inflation has continued to be lower than expected. The Riksbank's forecasts for the development of interest rates abroad have also been lowered.