The Riksbank is still prepared to do more to ensure that inflation rises towards the target if this is necessary. The exchange rate is floating – and highly volatile In other words, the exchange rate has considerable significance for inflation trends. The Swedish krona has floated since 1992. There are several factors that affect a floating exchange rate. Differences in rates of inflation in Sweden and abroad and differences in interest rates between Sweden and the rest of the world are two such factors. Net trade in goods and services is another. Differences in economic growth and monetary policy are also significant. It is very difficult to predict how the exchange rate will develop. One reason for this is that different factors have different significance at different points in time. Figure 7 shows how the value of the Swedish krona has developed in relation to an index of international currencies, the KIX. The greater the significance a foreign currency has for Swedish foreign trade, the larger the weight it is given in the index. The curves in the figure can be interpreted as showing what the foreign currency costs in Swedish krona. When the krona weakens, the foreign currency costs more and the curve rises. The KIX index is the exchange rate the Riksbank considers most important. The Swedish krona showed an appreciation trend from 2010 until the first part of 2013. However, there were substantial variations. From the beginning of 2014, the trend has turned, and the krona has weakened.
The other attraction of using the approach taken for the SMCR for future regulation is that it has been the preferred approach adopted by Parliament most recently when not constrained by EU regulation (for the rollout of the SMCR to insurers, which occurred in December 2018). This is an important consideration at a time of heightened debate, in a Brexit context, about so-called “Henry VIIIth” and “Cardinal Wolsey” powers. Although it is uncertain quite what those gentlemen’s views would have been on the output floor in Basel 3.1, my point is that making use of an approach recently chosen by Parliament seems to me to have considerable attractions relative to choosing something completely new and untested. Would it not, though, be easier and better simply to stick with the EU model through which we have recently imported a large volume of rules? This approach is radically different from the approach the UK has taken when left to its own devices. Indeed, the EU model, with a large body of technical rules set out in the equivalent of primary legislation, is quite different from how most of the world does it. For example, the EU and Switzerland were the only two members of the Basel Committee on Banking Standards where Basel 3 was implemented through primary legislation rather than the prudential authority’s rule-making powers – in major economies like the US, Australia and Canada the regulators did the implementation.