SPEECH RIKSBANK

DATE: 17 April 2024
SPEAKER: Deputy governor Martin Flodén

VENUE: Nordea, Stockholm

Communicating future monetary policy
- reflections after eleven years as mem-
ber of the Riksbank's Executive Board *

Thanks for the invitation to come here!

As this is one of the last speeches I will give before I leave the Riksbank, I would
like to take this opportunity to look back over time as member of the Executive
Board. It has been an eventful eleven years, which of course cannot be easily sum-
marised in one brief speech. I will therefore focus on something that throughout
this period has been central to our work, namely our monetary policy communica-
tion. More specifically, I am thinking here about how we use the forecast for the
policy rate and the minutes of the monetary policy meetings, where the Riksbank
has chosen a different path from many other central banks.

Our aim is to communicate as clearly as possible both about the motives behind
the monetary policy we are conducting now, and about how it may develop going
forward. This is not an easy task. The economy is constantly being subjected to
new shocks to which we must adapt. Our communication must relate to monetary
policy navigating its way in an uncertain world, but without being void of content.
Today I shall try to illustrate some of the problems we have faced, and some of
the lessons learned from occasions when we ought perhaps to have communi-
cated more effectively.

"Thank you to Maria Sjédin for her help in writing this speech, to Caroline Jungner for comments on the lan-
guage, to a number of employees at the bank for their valuable comments and to Elizabeth Nilsson for transla-
tion.

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RIKSBANK

From secrecy to transparency

Let me first take a few steps back in time. Common to almost all central banks is
that their communication changed completely in the 1990s and early 2000s. Previ-
ously, monetary policy was linked to secrecy and mystery.' Two quotations are of-
ten used to illustrate this:

"Never explain, never excuse" by Montagu Norman, Governor of the Bank of Eng-
land 1920-1944.

"Since becoming a central banker, I have learned to mumble with great incoher-
ence. If I seem unduly clear to you, you must have misunderstood what I said" by
Alan Greenspan, Chairman of the Federal Reserve 1987-2006.

Today, things look quite different. Following the collapse of the Bretton Woods
system, and the ensuing high inflation in the 1970s and 1980s, central banks were
given a clearer mandate to independently ensure price stability, often focusing on
a specific inflation target.

Both the delegation to independent central banks and the transition to inflation
targeting put new demands on the central banks. Their endeavours to attain
greater openness and clearer communication are partly explained by the need for
accountability that follows on from the central banks' increased independence,
and partly by the importance of expectations for monetary policy in an inflation
targeting regime.

Independence and accountability are two sides of the same coin

Independent central banks need to be evaluated, both by the political system and
by the citizens. Building confidence, creating legitimacy and popular understand-
ing are necessary to ensure that the general public supports the central bank's in-
dependence. And to attain this, the central banks must show that they are "doing
their job"; they must be evaluated and made accountable for their decisions.

One means of evaluating a central bank's work that may appear reasonable at
first sight is through target attainment. If inflation is at the target, monetary policy
has been successful, otherwise not. But it is not that simple. Monetary policy has
an impact with a time lag, and the economy is constantly being subjected to new
shocks that affect both inflation and economic activity. The work of the central
banks must therefore be evaluated on the basis of the conditions applying when
the decisions were taken.

Transparency, insight and openness are fundamental conditions for such an evalu-
ation. What information were the decisions based on? How was this information
analysed and assessed? What deliberations did the decision-makers face? Were
the analysis, deliberations and decisions reasonable given this information?

Monetary policy impact through expectations

The central banks' most concrete tool is the policy rate, that is, the interest rate
ona liquid and safe asset with a short maturity. This rate is important in itself, but

+See, for example, Goodfriend (1986) and Blinder (2004).

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RIKSBANK

the indirect effects that it has are even more important. One such effect is that
households and companies that make decisions must be able to form an idea not
only of what the interest rate is now, but also of how both the interest rate and
the value of money - the price level - will develop over time.

In other words, monetary policy to a large degree has its impact through expecta-
tions. A central bank can try to affect expectations by communicating how it will
probably manage the policy rate and other monetary policy measures going for-
ward. Communication is thus an integral part of the monetary policy strategy. If
the communication of monetary policy is transparent, factual and clear it also
makes it easier for economic agents to make good economic decisions. Monetary
policy thus functions better and more efficiently when a central bank is clear
about its objectives and the reasons for its decisions.

The Riksbank's transparency and communication stand
out

The changes in the Riksbank's transparency and communication culminated in
2007, when the bank began to publish attributed minutes of the monetary policy
meetings and also a forecast for the development of the policy rate a few years
ahead.

The Riksbank had gone in a short time from being a relatively closed central bank
to becoming one of the world's most open central banks.? One could say that the
bank went from "say as little as possible and say it cryptically" to "say as much as
possible in plain language" .?

These changes, which were made a few years before I came to the Riksbank, have
characterised my eleven years on the Executive Board. Communication has always
been a central part of our monetary policy work. In an international comparison,
the Riksbank's minutes from monetary policy meetings and forecast for the policy
rate stand out as rather special. Some say that the openness may have gone too
far. I don't think so. But the communication needs to be constantly evaluated and
updated. Communication that has not been carefully considered and properly
planned can be damaging rather than beneficial.

Today I would like to share some thoughts regarding the minutes and the policy
rate forecasts. I will try to explain why I think that they are so important and use-
ful in the Swedish context, where we need to communicate both the Riksbank's
overall view and the views of the individual board members. But I will also men-
tion some pitfalls that I hope future Executive Boards will be able to avoid.

2 The Riksbank is still considered one of the most transparent central banks. For example, Dincer, Eichengreen
and Geraats (2022) rank the Riksbank as the most transparent of the 112 central banks they examine.
3 See Meyersson and Petrelius Karlberg (2012).

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SVI
RIKSBANK

The minutes facilitate both scrutiny and decision-mak-
ing

In Sweden, each Executive Board member has an individual responsibility.' It is
therefore important for each and every one of us on the Executive Board to ex-
plain and motivate our individual monetary policy stance and the deliberations
behind it.

The Riksbank has been publishing minutes from the monetary policy meetings
since 1999, where it is possible to read whether and why a member of the Execu-
tive Board has entered a reservation against the monetary policy decision. With
effect from 2007, the members' personal reasoning was attributed to them in the
minutes and we now publish these minutes around one week after the decision.
The minutes provide an exact reproduction of what each Executive Board member
has said, with minimal editing.>

The fact that the minutes are published in this way has meant that we Executive
Board members carefully prepare our contributions. There is therefore rarely any
spontaneous exchange of views at the meeting. The important discussions and ex-
changes of views tend to take place instead at a number of meetings between the
Executive Board and the bank employees in the weeks prior to the monetary pol-
icy meeting.® However, this does not mean that the monetary policy meetings are
uninteresting or unimportant. The minutes with our statements at the monetary
policy meetings, fulfil several important functions.

Clarify each member's individual responsibility

To begin with, the minutes of the meetings clarify the Board members' individual
responsibility for the monetary policy decisions. Each member of the Executive
Board needs to account for their own views on monetary policy and on which
forecasts, deliberations and analyses these are based.

If one Board member has views that differ to a significant degree from the major-
ity decision, then he or she should of course enter a reservation against the deci-
sion. The minutes then become a platform where one can explain and justify in
greater detail how one's own analysis differs from the majority.

An outlet for opinions that facilitates joint decision-making

Another important function of the minutes is that they facilitate our joint deci-
sion-making. The monetary policy decisions do not only concern the current policy
rate, the Executive Board also decides on the forecasts and the monetary policy
reports with all the analyses and deliberations presented in them.

* For example, the Sveriges Riksbank Act states that the minutes of the monetary policy meetings shall represent
the stances the members have expressed.

> Other central banks that describe their monetary policy committee's monetary policy discussions in detail usu-
ally publish these accounts with a long time lag, often five or ten years. It is, however, common that central
banks publish a brief summary of the discussion at the monetary policy meeting soon afterwards, but (with the
exception of the Czech central bank) without stating what individual members have said.

©The minutes also contain a brief summary of the discussions held during the preparatory meetings. The minutes
are published on our website in Swedish and translated into English.

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Of course, not all of the Executive Board members have identical opinions on all
of this, but it is not reasonable that we should enter reservations on details in the
underlying reports or that each one of us should produce his or her own monetary
policy report.' The decision is therefore always to some extent a compromise. And
this compromise becomes easier to accept when we have an outlet where we can
discuss the nuances of the underlying reports.

Stability and consistency over time

Moreover, the minutes force the members to take responsibility for their own
stances over time. It becomes more difficult for a member to quickly and without
good justification change their opinion on a question on which they have earlier
communicated a particular stance. This can be both a good thing and a bad thing,
but I believe that the advantages outweigh in that monetary policy becomes a lit-
tle more consistent and predictable.

Regular and synchronised communication to the markets

A further advantage with the minutes is that they contribute to clearer communi-
cation, particularly towards the financial markets. As the contributions to the
monetary policy meetings function in the same way as published speeches on
monetary policy, the market receives a regular and synchronised update on each
Board member's views on monetary policy.

The contributions to the minutes then form a basis for the various monetary pol-
icy speeches that we hold between the monetary policy meetings. When holding
these speeches we can try to further explain and clarify how we see monetary

policy, but the idea is that they should not be about new assessments or stances.

We do this to make it clear that the decisions are taken at the monetary policy
meetings, and not on random occasions in between. It is at the monetary policy
meetings that Executive Board members formulate and document their views on
monetary policy and the considerations they are facing. This means that we avoid
the "signalling by degrees" that was previously common in connection with the
Executive Board's speeches.®

7 Blinder (2007) highlights related problems experienced by the Bank of England. Their monetary policy commit-
tee is, just like the Riksbank's, what Blinder calls "individualistic". On some occasions the members have been
unanimous with regard to the formulation of monetary policy, but not to the motives for the decision.

® See Meyersson and Petrelius Karlberg (pp. 54-55). What they mean with "signalling by degrees" is that the
members regularly provide new information in their speeches between the monetary policy meetings on what
monetary policy they will advocate at the next meeting. The monetary policy decisions then become more pre-
dictable, but communication does not become clearer or more effective. For example, it becomes unclear when
the decisions are made and what analyses they are based on. There is also a risk that different actors will receive
information at different points in time. Moreover, at the meetings the members may feel bound by the state-
ments they have already made and thus be less receptive to the bank employees' analyses and their colleagues'
reasoning.

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RIKSBANK

The interest rate forecasts characterise the Riksbank's
monetary policy process

Different central banks have chosen to communicate their future monetary policy
in different ways. The Riksbank is one of few central banks that publishes a fore-
cast for the policy rate that all or a majority of the Executive Board supports.°

There are of course other ways of communicating the future policy rate. Every
method has its pros and cons. The method that is the most appropriate for each
respective central bank can depend, for example, on the size and composition of
the monetary policy committee.

Let me focus on the forecasts for the policy rate that we at the Riksbank use. This
is the method that I am most familiar with, and moreover it characterises the
Riksbank's entire monetary policy work. I think that it characterises the work ina
positive way, but with some potential pitfalls that I hope can be avoided going for-
ward.

I will return to the pitfalls in a moment, but first I would like to mention the most
positive consequence of producing and publishing forecasts for the policy rate.

More intelligent conversations on monetary policy

We publish forecasts for inflation and the real economy. How these variable de-
velop depends on what monetary policy is conducted. A forecast that does not
show which monetary policy it is based on is therefore incomprehensible.

The fact that it is the Executive Board that stands behind the Riksbank's forecasts
means that we are forced to discuss the relationship between monetary policy
and the rest of economic policy during the monetary policy drafting process. The
Riksbank's external discussions also benefit from these relationships being clari-
fied.

One illustration of this is that inflation in our forecasts is almost always close to
the target in two or three years' time. This is no law of nature, but a consequence
of what we regard as well-balanced monetary policy. If we instead were to see
that inflation in the forecast deviates from the target for a long period of time, it
would probably be appropriate to change the monetary policy plan.

This also works in reverse. If someone, for example in our monetary policy draft-
ing process or in an external discussion, were to advocate a different monetary
policy plan, one would also need to explain why that plan is better. Does one have
a different view of what outcome is desirable? Does one have a different view of
what impact a particular monetary policy will have on inflation and the real econ-
omy? Or does one have a different view on other parts of the forecast?

° The central banks in Norway and New Zealand also publish forecasts for their policy rates. Unlike the Riksbank,
their monetary policy committees are what Blinder (2007) calls "collegial". All of the members support the deci-
sions, and they do not report their individual views of the monetary policy.

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The communication of interest rate forecasts is difficult

Our policy rate forecasts often receive a lot of attention. They are discussed both
in the media and on the financial markets. It is good that this discussion arises, and
sometimes it has shown that we have not used the forecast in the right way or that
our communication has been unclear. Allow me to now discuss some of the pitfalls
and problems that the policy rate forecasts have faced.

A few years ago we evaluated the experiences of publishing interest rate forecasts
and we could then conclude that the experiences were essentially positive. The
general public had gained greater insight into monetary policy, and interest rate
forecasts had created better opportunities for open discussion and evaluation of
monetary policy externally. Moreover, few of the concerns raised when policy
rate forecasts were introduced in 2007 had been realised.*°

However, we did also identify some problems. One was that policy rate forecasts
had not been particularly accurate. Another was that there had periodically been
major differences between the policy rate forecasts made by the market and
those made by the Riksbank. These problems remain, but there are further chal-
lenges in forecasting interest rates that I would like to comment on.

The tail-end lacks strength

Rosenberg (2007) stated that the main reason for beginning to publish our own
policy rate forecast was that it would make it easier for the central bank to steer
expectations of future monetary policy.

In practice, this has proved difficult. Policy rate forecasts have not become a pow-
erful addition to the Riksbank's toolbox. The Riksbank's policy rate forecasts have
often been very different from market expectations, and when the forecast has
been changed, it has usually been in the direction the market was already expect-
ing. Although several studies show that market rates have been affected by
changes in the Riksbank's policy rate forecasts, the impact on market rates has
been marginal and primarily concerned shorter horizons."

My conclusion from this is that the policy rate forecasts should not be regarded as
a substitute for actual policy rate decisions. Communication of how monetary pol-
icy is expected to develop in the coming period does affect market expectations
and is an important complement to the policy rate decisions. But most central
banks communicate this type of information in some way, with or without an in-
terest rate forecast. The method the Riksbank uses, with an explicit forecast, func-
tions well in that the communication becomes clear and straightforward.

To influence expectations in the slightly longer run, communication needs to be
stronger than a forecast; it needs to be more of a promise. The Riksbank has been
cautious with this type of information, and in my view very wisely so.'?

1° See Sveriges Riksbank (2017).

11 See Ahl (2017), Iversen and Tysklind (2017) and also Hofmann and Xia (2022).

22 I do not want to enter into a discussion today on the pros and cons of forward guidance, but I note that the
experiences of this are not solely positive for central banks that have tried to make binding commitments regard-
ing future monetary policy.

RIKSBANK

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On some occasions we have nevertheless communicated as if changes in the tail-
end of the policy rate forecast, that is, the part of the forecast furthest in the fu-
ture, meant that monetary policy became more or less expansionary. One exam-
ple of this is the meeting in April 2013, just before I joined the Executive Board.
Then, the forecasts for inflation and the policy rate were revised down substan-
tially, but the policy rate was left unchanged at 1 per cent. In December 2014 we
also communicated that a plan to hold the interest rate at zero for a longer period
of time meant that monetary policy became more expansionary.'?

In both cases, I believe that there was an unwillingness, for different reasons, to
cut the policy rate but that we nevertheless wanted to show an ability to take ac-
tion. Then we regarded changes in the policy rate forecast as a means of describ-
ing monetary policy as more expansionary despite the policy rate not being cut. It
would have been better to explain clearly why we did not consider that the policy
rate should be cut, despite the inflation forecast being worryingly low.*

Unwillingness to change the policy rate forecast

One concern that was mentioned when policy rate forecasts were introduced was
that they would be perceived as binding commitments. Some said that it would be
regarded as a failure by the central bank if it deviated from the earlier forecast. A
fear of this could lead to the Executive Board following the policy rate forecast in
its decisions, even if new information indicated that there was motive for other
decisions.

However, there is little to indicate that this concern has been realised. It has always
been made clear in the Riksbank's communication that the policy rate forecast is
not a promise, and the forecast has not in practice prevented the Executive Board
from making new decisions." This is most clearly illustrated in the monetary policy
decision in April 2022. We then raised the policy rate, despite the forecast at the
previous meeting in February 2022 being for the rate to remain at zero per cent for
the coming two years.

On the other hand, I have noticed a similar problem: an unwillingness to change the
policy rate forecast. Central banks want monetary policy to be predictable. To give
economic agents time to adapt to new conditions, it is preferable to make gradual
and small changes to the interest rates.'® The theoretical arguments for this type of

43 The motive given in April 2013 was: "The repo rate needs to remain at around 1 per cent until the second half
of 2014, to stimulate demand and ensure that inflation rises towards the target. This is almost a year longer than
was forecast in February." In December 2014 the motive was: "For inflation to rise towards the target sufficiently
quickly and to reduce the risk of longer-run inflation expectations continuing to fall, monetary policy needs to
become more expansionary. The Executive Board of the Riksbank therefore assesses that the repo rate needs to
remain at zero per cent for a somewhat longer period than was forecast in October."

4 In their evaluation of the Riksbank's monetary policy 2010-2015, Goodfriend and King (2016) expressed similar
criticism. They said that the Executive Board members had focused too much on forecasts for the policy rate fur-
ther ahead in time, rather than how it should be set in the near term.

+45 The decision in December 2018 is a possible exception. A divided Executive Board then raised the policy rate
from -0.50 to -0.25 per cent, despite new information since the previous meeting indicating both lower inflation
and weaker economic activity. The Governor then stated at the meeting that "[WJe have constantly anticipated
gradually increasing the repo rate when the conditions are right. In more concrete terms - over the last six
months, the forecasts and assessments that have formed the basis for our monetary policy decisions have been
based on the assumption that the repo rate would be increased towards the end of 2018. This has been clear
from our communication and has been visible in the repo rate paths."

+6 For example, Rosenberg (2007) expressed this as a principle for the Riksbank.

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interest rate smoothing may not be entirely convincing, but in practice it is a sound
principle.

But this unwillingness also seems to apply, perhaps even more so, to communica-
tion regarding future policy rates. The unwillingness applies to both large and small
changes. Between every monetary policy meeting we always receive new infor-
mation on how the economy is developing. As a result, we almost always change
our forecasts for inflation and the real economy, even if the revisions are very small.
But the interest rate forecast is an exception. We have often chosen to publish a
forecast that is identical with the previous one.

The argument for not making small changes in the policy rate forecast is typically
that this would indicate that monetary policy reacts to noise or unimportant new
information. One risk I see here is that this "noise" accumulates into something
more significant over time. Finally, we have a policy rate forecast that deviates far
from what the market, and perhaps even we ourselves, believes. And in this situa-
tion it can be difficult to make a major revision to the forecast, as there is no im-
portant new information to attach the revision to.

In our most recent Monetary Policy Report we only highlighted our forecast for the
policy rate in the coming three quarters in connection with the monetary policy
deliberations at the beginning of the report. The forecast for the policy rate during
the remainder of the forecast period was presented later on in the report. This di-
vision will hopefully make it easier to allow new information to affect the forecasts
for the policy rate beyond the next couple of meetings, even if it can be regarded
as noise.

An expected value does not always appear to be a reasonable scenario

The Riksbank's policy rate forecasts in autumn 2023 have been called into question,
particularly by participants in the financial markets. In November last year, our fore-
cast was that the policy rate would remain at around 4 per cent until the middle of
2025. The criticism we received was in two parts. One was a claim that it was diffi-
cult to understand why the policy rate should remain unchanged at a tightening
level when the forecast for inflation was that it would fairly soon be at the target
level. The other was a claim that the forecast was unrealistic, as both pricing on the
financial markets and the forecasts of several other analysts indicated that the pol-
icy rate would be cut by at least one percentage point during the same period.

I think it is fairly easy to dismiss the first part of this criticism. Our forecasts are
normally expected values, and the expected values for various scenarios do not
necessarily appear to be a reasonable scenario in themselves.

Last year, we were worried that inflation had repeatedly been much higher than
both we and other analysts had expected, at the same time as the real economy
showed surprising strength. Another way of expressing this is that our interest rate
hikes had become less contractionary than expected.' One can see our forecast as
the average of two scenarios for how much the policy rate would need to be raised

17 A further way of expressing this is that the short-term so-called neutral interest rate was higher than we be-
lieved.

RIKSBANK

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to be sufficiently contractionary."® In one scenario, the policy rate would need to
continue to be raised, while in the second scenario, it could soon begin to be cut.
However, in both scenarios inflation would fairly soon be brought back to the target
and developments for the real economy would also be similar.

The second part of the criticism is a little more difficult to deal with. Many people
probably believe that we Executive Board members tried to use the tail-end of the
interest-rate forecast horizon to signal a monetary policy we didn't really believe
in. It is true that we have been worried that the discussions on interest rate cuts
may mean that monetary policy becomes unjustifiably expansionary. I nevertheless
think that such concerns were not the motive behind our interest-rate forecasts in
the autumn. We were genuinely uncertain over whether monetary policy had be-
come sufficiently contractionary for inflation to fall back to the target within a rea-
sonable period of time.

In general, I think that some of this uncertainty remains today, despite inflation
prospects looking brighter and our interest rate forecast having been lowered sig-
nificantly. Our forecast at the monetary policy meeting in March was that the policy
rate can probably be cut at one of the next two monetary policy meetings. But this
is not a promise.

At the meeting, I pointed out several risks that could put a spanner in the works for
early policy rate cuts: a continued weakening of the krona, a continued strong US
economy, rising commodity prices and a rapid increase in demand in the Swedish
economy, too. We have seen signs of all of this in recent weeks. But we have also
received a new inflation outcome, for March. Inflation was much lower than our
forecast, which reinforces the picture that inflationary pressures will soon have nor-
malised and that we can begin to ease our monetary policy. We will return to the
implications of all this for the policy rate decisions in a few weeks' time, at the next
monetary policy meeting.

The forecast has sometimes been a main scenario rather than an expected value

On some occasions, I believe that we ourselves have contributed to confusion by
thinking of the policy rate forecast as a main scenario, that is, the most likely sce-
nario, rather than an expected value. I am thinking in particular of when the interest
rate was at or close to its lower bound.

The monetary policy meeting in February 2022 is an example here. The policy rate
was then at zero per cent. Although we have previously shown that it is possible to
cut the policy rate to lower levels, many probably consider that fairly strong reasons
would be needed to return to a negative policy rate. Moreover, at the beginning of

18 In the Monetary Policy Report published in November 2023, we showed two scenarios similar to those I am
describing here. The average of the scenarios implies that the forecast for the policy rate is fairly flat at the same
time as inflation moves towards the target, roughly as in our forecast. However, to fit my description here the
cause of the scenario with high inflation ought to have been either that monetary policy had a smaller than ex-
pected impact or that economic activity was unexpectedly strong.

19 A similar discussion was held with regard to international monetary policy last year. The question was asked
whether the development of the interest rate should be more similar to the Matterhorn (steeply upwards and
then steeply downwards) rather than Table Mountain (become stuck on a high plateau). My point is that the
forecast can be similar to a Table Mountain when one moves upwards even though one knows that develop-
ments ex post will look similar to the Matterhorn; if one does not know how high the mountain is, one doesn't
know how long one will need to climb before going downwards again.

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2022 there was nothing to indicate that monetary policy would need to become
more expansionary. The discussion instead concerned how one should interpret
the high US inflation and the rising energy prices in Sweden and abroad. How long
would the US inflation last? What risks were there that it would also spread to Swe-
den? Would the high energy prices spread to other prices?

Our analyses at the Riksbank concluded that the risk of inflation accelerating in
Sweden had increased. However, the inflation outcomes we had received indicated
that inflationary pressures were still weak. For instance, underlying inflation had
fallen to 1.7 per cent in the most recent outcome. Although some service prices
rose quickly, they seemed to be prices that were restored to normal after falling
during the pandemic. And Russia had not yet begun its full-scale invasion of
Ukraine.

A reasonable scenario was therefore that the environment of the past decade or so
with weak inflationary pressures and low interest rates both in Sweden and abroad
would persist. This was reflected in our policy rate forecast, where we assessed, as
before, that it would be appropriate to hold the policy rate at zero per cent for
several years. But at the same time, the risks linked to this scenario had changed
and were fairly clearly on the upside with regar