rfr · H30WRFR7 · 2016-01-19 00:00:00 — Governor Ingves concluded his own view of the current situation saying: “currently has an expanding economy and we need to focus on balanced growth now that the recession is behind us. One risk with not raising the repo rate now, when the interest rate level is low in comparison to other economic upswings, is that the interest rate would have to be substantially increased later on. The current strategy of gradual increases is a safer choice, particularly when the starting position of these increases is far from the interest rate level to be expected under reasonably normal conditions” (Minutes, p. By the 2011 Monetary Policy Meeting, the Swedish economy had continued to develop much as forecast in April. In the main scenario, GDP growth was forecast to slow from in 2011 to in 2013; the unemployment rate was forecast to fall from in 2011 to in 2013; and CPIF inflation was forecast to rise from in 2011 to in 2013. The Riksbank's forecast of policy rates abroad was revised down marginally from April. Despite intensified euro area concerns, evidence of a deceleration of the high rate of growth in emerging markets, and evidence that the expansion in the could be slower than expected, global GDP growth overall was forecast in the main scenario to be in 2011. voted again to follow through on its forecast and raise the repo rate from to and to leave unchanged the repo rate path from its April meeting so that the repo rate rose gradually to by the third quarter of 2014. In marked contrast to the last few policy meetings, expectations of future interest rates had shifted downwards by almost 50 basis points over horizons of one or two years since the previous policy meeting, ending up at in 2014 (Minutes, p. This development was highly significant. Riksbank monetary policy began to lose market credibility again, as it had in the first half of 2010. The fall in Swedish repo expectations mirrored similar declines in policy rate expectations in the euro area, the US, and in the UK. Global markets apparently took a more pessimistic view of the deterioration in future economic than the main scenario of the Riksbank (MPR, p. justified its policy action much as it did in . As they had done since October 2010, and entered a common reservation against the majority decision. Again they accepted the increase in the repo rate at the previous (April) monetary policy meeting; but they argued against raising the repo rate, now , further to , instead favouring a gradual rise to the same endpoint of the forecast horizon favoured by the majority of . It is notable that both dissenters accepted only a slightly lower current repo rate than the majority, and focused their difference of view on likely future rates. During the discussion in the meeting, and complained that although the Riksbank's forecast for overseas policy rates had been revised downwards in the draft compared to the forecast in April, it was still well above the policy rates that appeared to be 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 expected in the market. thought that “[i]f the forecast deviates from implied forward rates, then it is important to discuss and justify these deviations…There should be no ground for suspecting that the Riksbank pro- duces high forecasts for foreign interest rates in order to justify a high repo- rate path” (Minutes, p. Governor Ingves responded by saying “with regard to whether the Riks- bank should produce its own forecasts for international policy rates or use for- ward market pricing…this issue had been discussed before and as far as he could see the majority had not changed its view and there was thus no need to discuss the issue further today…” (Minutes, p. As he had done in April, again presented extensive alternative simulations assuming his preferred sustainable unemployment rate and foreign interest rates, showing the potential for disinflation and higher unem- ployment than in the main scenarios. And he called for more discussion of alternative repo rate paths in the than the two pages of text out of seventy (Minutes, pp. Later in the meeting, Governor Ingves credited the tightening of monetary policy in 2010 with the positive outcome for the Swedish economy since then (Minutes, p. responded with a different interpretation pointing out that “the majority of members began to raise the repo rate and tighten monetary policy, despite the CPIF forecast under- shooting the target and despite the forecasts for all measures of resource utili- sation falling below normal levels ... under these conditions one might expect that the real economy would show a rather poor development…[w]hat saved the Swedish economy may have been that the actual monetary policy was much more expansionary than intended” (Minutes, p. According to , it had more or less been the case since February 2010 that since the Riksbank's repo rate path lacked full credibility, the five- year rate that matters for economic activity was around 100 basis points lower than a five-year rate compatible with the Riksbank's repo rate path. son believed that this could be a large part of the explanation as to why growth was unexpectedly high in 2010 (Minutes, p. Referencing the looming pessimism about global developments, man-Parak “noted that there was speculation in the monetary policy debate as to whether a lower repo-rate path would be likely at this meeting. thesis it can be noted that not so long ago the speculations were the reverse” (Minutes, p. Phase 2: Pause for Thought, September 2011-October 2011 Market concern over sovereign debt in the euro area and in the , and concerns regarding global growth, intensified in the months before the Monetary Policy Meeting. Elevated risk aversion pushed down long-term bond rates and stock markets fell sharply in and abroad. The most important markets for Swedish exports were expected to 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 slow down significantly. Consequently, 2012 Swedish GDP growth was revised down in the main scenario from to ; and the forecast for Swedish unemployment in 2012 was revised up from to and from to in 2013. CPIF inflation was expected to be about a half percentage point lower in coming years than forecast in . And various confidence indicators in , such as the purchasing managers' index and 's Economic Tendency Barometer, had fallen sharply. decided to stop raising the repo rate for the first time since 2010, to hold the repo rate at , and to revise the repo rate path so it only reached in Q3 2014. As in , monetary policy expectations - measured in implied forward rates - fell again across the entire forecast period. They showed that there was now some expectation that the repo rate would be cut by a half percentage point or so during 2012 (MPU, p. The credibility gap between the Riksbank's repo rate path and market expectations had widened to around 1 percentage point by the end of 2012. As they had done since October 2010, and entered a common reservation against the majority decision. They accepted the increase in the repo rate at the previous () monetary policy meeting and agreed to keep the repo rate at , but they advocated a more gradual increase in the repo rate path to only by the end of the forecast horizon. This time both dissenters accepted the majority’s current repo rate and again focused their differences entirely on likely future rates. During the policy meeting, members noted that since the sentiment in the financial markets and the media had deteriorated drastically. They noted the sensational downgrading from one of the credit rating agencies of Treasury debt. They debated the likely depth and persistence of the deterioration of economic conditions for the US and the euro area and . called these developments a “black ” (Minutes, p. In , had “believed that the repo rate could need to be raised at all three meetings in the autumn, especially if it turned out that the sovereign debt problems in the euro area could be handled without tangibly negative effects on the financial markets. But developments since then had caused [him] to change his mind…the risks of higher inflation that [he] saw at the previous monetary policy meeting had not materialised…forecasts for inflation have been revised down” (Minutes, p. complained again that the widened spread between implied foreign rates and the Riksbank’s forecast distorted the outlook for inflation: “it is as though the analysis is based on five-year interest rates abroad being 100 basis points higher than they actually are” (Minutes, p. He also pointed out that the market's expected future repo rate path in had fallen sharply since and now showed repo rates to fall to by the end of 2012 and to remain there. By the fall of 2014, the Riksbank's repo rate path now exceeded the market's expected repo rate path by 2 percentage points, indicating 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 a huge credibility gap for Riksbank monetary policy that made actual policy much easier in fact than intended policy. Later in the meeting he argued that “[i]t would be devastating for the Swedish economy if the repo-rate path be- came credible and the five-year rate rose by 170 basis points” (Minutes, p. With regard to the effect of international interest differentials on the krona, changed her mind and “agreed with and that the krona appears to belong to the group of currencies whose value is pushed down in periods of market turbulence…Periods of market turbulence are typically periods with low interest rates, like now. ine that increased interest differentials to other countries at present would be linked to weaker appreciation pressure on the krona than would be the case in a more normal situation” (Minutes, p. At the October 2011 Monetary Policy Meeting, expectations of growth in the and in the euro area for 2012 were both revised down a There was less turmoil and volatility in financial markets than in The main scenario now forecast slightly slower GDP growth for in 2012 than in . CPIF inflation was running at in 2011 and forecast to slow a more to in 2012. But the main scenario forecast still showed a return to by Q3 2014. It was becoming increasingly clear that problems in the euro area would continue for some time to come. decided to keep the repo rate at until the end of 2011, and to increase the repo rate path more slowly to only by Q3 2014. and dissented jointly again, this time preferring an immediate cut in the repo rate to , and a lower path that kept the repo rate at from Q1 2012 through Q1 2013 and then increased the rate to slightly above by Q3 2014. They again objected to the Riksbank's assumed foreign policy rate path in the main scenario being much higher than market expectations based on implied forward rates. As usual there was extensive debate among Board members revisiting is- sues that had been brought up at earlier meetings. There was some sharpening For instance, as part of his six pages of analysis of the policy decision in the Minutes (pp. 12-17), was highly critical of the analysis given in the underlying the forecasts in the main scenario and thought the reasoning underlying the majority policy deci- sion to keep the repo rate was inadequate. To illustrate his argument, introduced a diagrammatic presentation of his own alternative to the main scenario using i) foreign interest rates according to implied forward rates and ii) an assumed sustainable unemployment rate of . result was that 's repo rate path in 's scenario caused CPIF inflation to fall to in 2012 and return only to around at the end of 2014 (Minutes, p. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 Phase 3: Disappointment and Easing, The most significant feature of the Monetary Policy Meeting was the sharp downward revision of growth . GDP growth in the euro area in 2012 was revised down from to . Consequently, in the main scenario the growth of Swedish exports in 2012 was now forecast to slow sharply from to ; and 2012 GDP growth itself was revised down from to , with unemployment in 2012 now forecast to rise to from . Forecasts for CPIF inflation were revised down slightly to for 2011, and and in 2012 and 2013, respectively, before rising to in 2014. decided to cut the repo rate to and lowered the rising repo rate path by about 0.3 percentage points to end at in Q4 2014. Implied forward rates indicated that the credibility gap continued to widen as markets now expected the repo rate to be cut in stages by just over to summer 2012 (MPU, p. and dissented jointly again. They preferred cutting the repo rate to immediately, and a path that stayed at from Q2 2012 through Q3 2013, and then rose to just below . This was justified by their assessment that the Monetary Policy Update's forecasts of foreign policy rates and Swedish resource utilization were both too high. emphasized that the outlook for inflation and unemployment was much poorer now than at the meeting in October. argued for the repo rate cut saying that “…inflationary pressures are low now and will remain low in the period ahead. Various measures of underlying inflation are clearly below 2 per cent according to the latest outcomes and according to the forecasts for next year in the draft Monetary Policy Update”. pointed out that “[i]nflation expectations five years ahead are on the other hand stable at just over 2 per cent according to the Prospera survey in , which indicates that there is confidence in the ability of the Riksbank to keep inflation close to the inflation target in the long run” (Minutes, p. At the February 2012 Monetary Policy Meeting, the forecast for 2012 GDP growth in the euro area was revised down again from to -compared with . In the main scenario the growth of Swedish exports in 2012 was forecast to slow from to , and 2012 GDP growth was revised down sharply from to . Unemployment in 2012 was now forecast to rise to from and to fall to by early 2015. Forecasts for CPIF inflation were revised down for 2012 slightly to . decided to cut the repo rate to , to keep it there for one year, and then gradually raise it from mid-2013 to about at the beginning of 2015. Figure 3:13 in the shows that market expected repo rates shifted up by about 50 basis points from toward the Riksbank's repo rate path and were expected to fall only to by mid-2012 and stay there 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 The Prospera January survey conformed more closely to the Riksbank's published repo rate path. This time and entered reservations separately. Both preferred to lower the repo rate to . rate path that stayed at from Q3 2012 through Q3 2013, and then rose to slightly above by the end of the forecast period. path that stayed at from Q3 2012 through Q3 2013, and then rose to Board members expressed varying degrees of pessimism about develop- ments in the euro area. The Riksbank's forecast of policy rates abroad con- formed more closely to market expectations, but and regretted that there had never been an adequate discussion of the relationship between the two in the monetary policy report. the large credibility gap between the Riksbank published repo rate path and market expectations commenting that “the Riksbank's policy-rate forecasts have lost contact with reality” (Minutes, p. shifted upward toward the Riksbank repo rate path in but they re- mained far below it. considered the Riksbank’s repo rate path to be too high be- cause: i) the forecast of foreign policy rates was too high, ii) forecasts for the euro area and thus for Swedish exports were too optimistic, and iii) the Riks- bank assumed too high a sustainable unemployment rate (Minutes, p. had been arguing since that in his view target fulfilment could be even better if the repo rate path was lowered much further than in the main scenario. However, his dissents proposed only modest depar- tures of policy from the main scenario because “it requires considerable re- sources and there are a number of technical difficulties that have not yet been resolved when it comes to making forecast calculations for repo-rate paths that are far from the main scenario and thereby determining more precisely which path is best” (October 2011 Minutes, p. “a large and serious problem in the decision-making process is that, in prac- tice, there is no scope for a serious, in-depth discussion of different policy There should be at least two alternative repo-rate paths with at- tendant carefully-analysed forecasts for inflation and resource utilization, to- gether with discussions of target fulfilment for the various alternatives. out this, the decision-making material is insufficient. How can the members of take reasonable decisions if the consequences of the al- ternative repo-rate paths have not been properly examined?” (Minutes, p. Later in the meeting, supported 's proposal saying “[s]he sees it as important that analyses [alternative repo- rate paths] thoroughly in the future, preferably before the next decision, in a context in which the entire is involved and discusses the rea- sonability of the analysis” (Minutes, p. Elsewhere in the meeting, observed that the draft Monetary Policy Report indicated that the lower repo rate was associated with a rate of 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 CPIF inflation just above in 2014. This might argue against the path, she said, if it is believed that it entails a risk of inflation expectations drifting away from the 2 per cent target. However, she thought this risk was very low. At the Monetary Policy Meeting the main scenario again downgraded its forecast for euro area GDP growth to -in 2012. After contracting more than expected in 2011, Swedish exports were expected to grow by only in 2012. Other aspects of the main scenario were changed from February to April. decided to keep the repo rate at , remain there for one year, and then increase it towards at the end of the forecast period. Again and dissented separately. They both preferred lowering the repo rate to and a lower path than in the Monetary Policy Update. But preferred a repo rate at through Q3 2013 rising to by 2015. preferred a repo rate that stayed at from Q3 2012 through Q3 2013, and then rose to by 2015. The policy meeting again assessed the seriousness of developments in the euro area and revisited issues addressed in previous meetings. Some new concerns and views were advanced. took up what he called three issues of principle: i) how monetary policy should be conducted and assessed, ii) that the policy process consists of two distinct steps, and iii) one should not forget the longer-run perspective. Among other things he argued that the process followed by the Riksbank lacked clarity associated with i) the use of CPI and CPIF inflation, ii) the use of measures of utilization other than unemployment, and iii) the use of target attainment at the end of the forecast period rather than over the entire period. , who had joined in January 2012, commented later that “he did not really understand the point of taking up these issues at the monetary policy meeting. These are questions that can be discussed at length, but there is not enough time available at a meeting of this nature. said that makes it sound as though the Ex- ecutive Board has never discussed these issues before, which he considers to be totally misleading…As a general comment on 's contribution regarding issues of principle, said that he considers it important not to confuse what is right and what is wrong with different people having different opinions on difficult matters that do not have self-evident answers” (Minutes, p. raised a new concern about the monetary policy process. Her argument began by repeating that she, like , “found it difficult to see any reasons why the repo rate and the repo-rate path should be held unchanged, inflationary pressures are low at present and, as pointed out in the draft Monetary Policy Update, are expected to remain so for a large part of the forecast period. CPIF inflation is not expected to reach until late 2013”, and she wondered whether “the model analysis of alternative repo-rate paths discussed at the monetary policy meetings is based on a monetary policy response that is unrealistically rapid. If this is the case…there is a risk of failing 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 to bring CPIF inflation up to ...if the repo is not cut more substantially in the current situation” (Minutes, p. Later, in a slightly different context, continued this line of rea- Referencing a point made earlier by that the Riksbank has a track record of inflation falling below its target since 2000, Ms noted that “there may be tendencies in the decision-making process itself that have led to such an outcome. Throughout her period on the Execu- tive Board there has been a tendency to be content with simply getting back to the target towards the end of the forecast period in situations when inflation has fallen below target” (Minutes, p. Earlier in this meeting Governor Ingves had pointed out that the IMF's most recent World Economic Outlook showed that recessions preceded by a rapid increase in debt tended to be both deeper and more prolonged than recessions where there is a normal development in debt. He argued that “these risks should not be overlooked… [and that] it is therefore important to also consider debts among both households and companies when formulating monetary pol- This is particularly important, [he pointed out] in a situation where Swe- den has not yet made it clear how questions of macro-prudential policy will be managed” (Minutes, p. The euro area crisis flared up again in late spring with the spotlight on The main scenario at the 2012 Monetary Policy Meeting assumed that the problems would be managed but nevertheless downgraded euro area GDP growth. However, the Swedish economy had done well in the first half of 2012; and the forecast of growth of private con- sumption for 2012 as a whole was revised from to . inflation and unemployment in the main scenario were changed, for inflation 2012 and for unemployment, and still expected to reach and respectively in 2014. decided to continue April's policy decision -- to leave the repo rate at through mid-2013 and then increase it to by mid- However, markets expected repo rates to fall below by late 2012, slightly lower than in April (MPR, p. and dissented advocating instead lowering the repo rate to . preferred a repo rate path at through Q3 2013 then rising to . preferred a repo rate at from Q4 2012 through Q4 2013, then rising to . Their reasoning was much as in earlier During the meeting members debated how to balance de- teriorating conditions in Europe against apparent strength of the Swedish econ- “He could see no reason to set aside the mandate of price stability and high- est sustainable employment in order to conduct some form of ’leaning against the wind’ policy and thereby a tight monetary policy, in the belief that one will thereby improve financial stability, for example, by limiting mortgage growth. 5 THE EVOLUTION OF MONETARY POLICY 2010-2015 There is no theoretical or empirical support for the claim that a higher repo rate in under current conditions would have a significant impact on financial stability in and that this would be a reason for inflation below the target and unemployment above a long-run sustainable rate” (Minutes, p. Nevertheless, reflecting the views of the majority of , observed that: “Household indebtedness, as in February and April, continues to be a factor on the that in his opinion weighs against making further cuts in the repo rate. He did not feel that the risk situation was now more serious than previously, but the high debt ratio of the households continues to make the Swedish economy more vulnerable and fragile than it would be if the level of indebtedness was lower.