It is not, as one might sometimes get the impression in the current debate, a result of the Riksbank systematically putting on the brakes, thus pushing down demand and holding back price increases. If this had been the case, the low inflation would have gone hand in hand with a much weaker growth in the economy. So is this development in inflation a poor result for monetary policy? It is of course possible to have different opinions on this. But from what I have said so far, it should be clear that I believe there are good explanations as to why inflation has been slightly lower than the target. The repo rate has been cut more than it has been raised during this period, and there have been changes in the economy – which have been difficult to forecast and often beneficial – that have dampened inflation.6 To gain further perspective, it may also be valuable to go back to where I started, twenty years ago, just before the inflation target was introduced. As I observed earlier, the high inflation trend at that time was a fundamental problem in the Swedish economy. During the decades preceding the crisis of the 1990s, average inflation was almost in double figures and varied substantially from year to year.
On 6 October, a statement of government policy declared that there was almost total support for the hard currency policy and that the prospects of success were good. We all know what happened. Just over one month later, on 19 November, the Riksbank was forced to give up the fight and the krona was allowed to float, or perhaps I should say sink. As I have understood things with hindsight, there was no clear plan in place as to how monetary policy would be conducted from then on.1 And this was perhaps not so strange – with the exception of a couple of brief periods between the wars, Sweden had had a fixed exchange rate for the past 120 years. So it was probably difficult to think along new lines. The aim also seems to have been that Sweden would return to some form of fixed exchangerate system as soon as possible, and so the idea was to find some way of conducting monetary policy until then. Inflation targeting has worked well, but has been criticised Some countries, New Zealand, Canada and the United Kingdom, had begun to apply a new type of monetary policy known as inflation targeting. This entailed setting a numerical target for inflation, which the central bank then tried to attain by using the policy rate to affect aggregate demand. Sweden also jumped onto this bandwagon and it proved to be a much more enduring solution than most people expected at the time.