But it is possible to find both arguments in favour of stabilising inflation a couple of percentage points above 2 and arguments in favour of a target that is lower, perhaps even 0 per cent. One argument for having an inflation target above zero is that it reduces the likelihood that the economy will suffer periods of deflation. If the target were to stabilise inflation around 0 per cent, inflation would probably fall below 0 during certain periods. That is, prices would periodically fall instead of increasing. There would then be a greater risk that inflation expectations – which should be around 0 per cent – would slide downwards so that households and companies would begin to expect a more lasting fall in prices. This could, for instance, lead to households and companies delaying their consumption and investment until later, when prices have fallen even further, thus leading to a decline in demand. This could in turn reinforce expectations that prices will fall and it could create a negative spiral that is difficult to reverse. Having an inflation target that is slightly above zero thus gives some protection against this. So, the inflation target should perhaps be greater than zero, but not too high. A few years ago, professors Francesco Giavazzi and Frederic Mishkin made an evaluation of monetary policy in Sweden during the ten years we have had an inflation target. One of the questions they discussed was the size of the inflation target.
The assessment of the Executive Board members was that cutting the repo rate from 3.75 to 2 per cent was necessary both to dampen the fall in production and employment and to attain the inflation target of 2 per cent. The situation in the financial markets both in Sweden and abroad had not improved appreciably, despite central banks and governments around the world implementing forceful measures. The markets for medium and long-term borrowing were functioning poorly, and sometimes not at all, and liquidity premiums were still high. The financial crisis had severely hampered access to credit and we could see clearly how this was reinforcing the downturn in the development of the economy. GDP had begun to fall in important parts of the world around us, economic indicators were at historically low levels and share prices had fallen drastically in recent months. Energy and food prices had fallen substantially since the peak in the middle of the year and this brought some relief for households. The downturn also contributed to a fall in inflation and in this way there was greater scope to counteract the negative developments by cutting policy rates, both in Sweden and abroad. Our earlier forecast was that the Swedish economy would be tangibly affected by the financial crisis and that there would be a sharp downturn in international economic activity.