Australia has had an inflation target of between 2 and 3 per cent for CPI inflation over the cycle since 1993, and its average inflation rate in the period 1996–2011 was 2.7 per cent. 13  11  An older method of calculating the rate of inflation with an unchanged consumer basket was used in real-time data prior to 2005. Using the current method of calculating the inflation rate as the percentage change in the CPI, average inflation was 1.3 per cent during the period 1997–2011, but real-time data are more relevant when evaluating monetary policy. See Sveriges Riksbank (2004). 12  In the period 1992-1996 the target was expressed as 2.5 per cent or lower in terms of the RPIX. RPIX = Retail Price Index. In the United Kingdom the CPI corresponds to the HICP price index. Since 1993 the average HICP inflation rate has been 0.75 percentage points lower than average RPIX inflation. 13  New Zealand has had an inflation target since 1990, but its target has been adjusted upwards twice and thus one cannot say that it has had a fixed inflation target. 10  BIS central bankers’ speeches  How have things turned out for the large economies, the euro area and the United States? The euro area has had a target for inflation, although during a shorter period than the countries mentioned earlier. The target is that inflation should be below but close to 2 per cent.
This is thus an example of a situation where raising the policy rate will if anything increase the risks to financial stability. 10 Using policy rate to influence housing prices is costly There are also many references to developments in housing prices in the monetary policy debate. Monetary policy would appear to have very little effect on housing prices. If one nevertheless uses the policy rate to influence housing prices (and thereby mortgage growth) this will lead to large costs to the real economy. A study by Claussen, Jonsson and Lagerwall (2011), which is included in the Riksbank’s inquiry into the risks in the Swedish housing market shows, for instance, that it would have been very costly in terms of both production and inflation to try to prevent the upswing in housing prices from 2004 onwards using monetary policy. Keeping housing prices at a long-run trend level in 2004–2010 would have required repo-rate increases over several years of up to 5 percentage points in both 2006 and 2007. GDP growth would then have been on average almost 2 percentage points lower up to 2010, which corresponds to an accumulated GDP loss of around 12 per cent. CPIF inflation would have been on average 3 percentage points lower during the same period. The study confirms for Sweden what several other international studies have concluded, such as Assenmascher-Wesche and Gerlach (2010).