However, the fact that inflation has been so low has changed the conditions for monetary policy. The unexpectedly low inflation was the reason why the repo rate was cut in December last year by a unanimous Executive Board, at the same time as the repo-rate path was revised down substantially. At the most recent monetary policy meetings there has been greater focus than before on inflation. 18  The Canadian central bank governor recently described monetary policy as an exercise in risk management, where the risk of inflation falling and moving even further from the target has to be weighed against the risk of financial imbalances. He emphasises that the credibility of the inflation target cannot be taken for granted, but must be earned by clearly focusing monetary policy on attaining the target (Poloz, 2013). BIS central bankers’ speeches  11  Perhaps the lesson here is that a monetary policy that leans against the wind is difficult to combine with an inflation target. Although there may be justification for slowing down credit growth in some situations, it may be difficult to use monetary policy for this purpose if there is an explicit inflation target. In practice, one tries to attain two targets with one single instrument and there is then a risk that one will not be particularly successful in attaining either of them. References Adolfson, Malin, Laséen, Stefan, Christiano, Lawrence, Trabandt, Mathias, and Walentin, Karl, (2013), Ramses II: Model description, Occasional Paper no. 12. Sveriges Riksbank. Swedish Bankers’ Association (2013), Stärk amorteringskulturen amortisation culture).
We have been able to observe that it is a broad-based decline in inflation, to the extent that all major components are affected.6 Low inflation has come to be a widespread phenomenon and many countries and regions have recently reported inflation rates clearly below their targets. Inflation has fallen particularly sharply in the euro area. The fact that this happens in a situation where there is plenty of spare capacity – which is the case in large parts of the euro area – is not particularly surprising. However, the downturn in Swedish inflation is larger and has been going on for longer than in other countries. And the question is why... One possible reason, which was also discussed in an article in the latest Monetary Policy Report in February, is that Swedish companies have not been passing on their cost increases to consumers as much as is normal.7 They have thus not increased their prices to the extent that one might expect, given the historical relationships with unit labour costs and import prices faced by producers. There may be several reasons for this, but one is that margins may decline when economic activity is weak, which is also noted in the article. Current research using US data implies that price mark-ups vary positively with the business cycle.8 Another reason may be that the weak development in the euro area has hit Swedish exports hard and that this has contributed to resource utilisation being lower than normal over a long period of time.