40  In keeping with BIS traditions, Borio encourages central banks to  lean into the wind, accepting lower inflation outcomes, for both macroprudential reasons and to accommodate the positive global supply shock. 41  In my view, the bar for changing monetary policy frameworks should be very high. Consider the Bank of England. We have a wide range of macroprudential tools that allow monetary policy to be the last line of defence against financial stability risks. Our monetary policy remit from HM Government gives the MPC the necessary constrained discretion to respond flexibly to real shocks, including from globalisation, while maintaining the primacy of price stability. More generally, to the extent there is “good deflation” from globalisation, it exists in parallel with lingering risks of an old-style, Fisher debt deflation which could be very bad indeed. I am also mindful that central banks have generally been able to achieve their objectives and that, with the strengthening and broadening global expansion, cyclical forces should ease constraints on central banks. In addition, as demand in a number of major economies rotates from consumption towards investment 12) and as fiscal policies become less contractionary,  43  42  (Chart  short-term equilibrium real interest rates should rise  everywhere. This means that a static monetary policy stance becomes more expansionary all else equal. Chart 12: Strong capital goods orders point to demand rotating towards investment  Sources: Sources: Thomson Reuters Datastream and Bank calculation. 40  Borio, Presentation on the BIS 87th Annual Report, ibid.
It is namely the case that the preliminary works to the Sveriges Riksbank Act emphasise that the monetary policy instruments shall only be used to maintain price stability, and thus not to promote a safe and efficient payment system.3 We sometimes say that monetary policy shall take financial risks into account, as it can be difficult to stabilise inflation around the target if households are forced to rapidly reduce their debts.4 Such difficulties could arise, of course, but for me it is not consideration of the inflation target that mainly justifies letting monetary policy take financial risks into account. Instead I perceive taking financial risks into account to follow on from the task of “supporting the objectives of general economic policy with the aim of achieving sustainable growth”. A monetary policy that leads to an unhealthy build-up of credit or other financial imbalances is scarcely compatible with sustainable growth. But this task, like the task of stabilising economic activity, is subordinate to the inflation target. Monetary policy’s consideration of financial risks must therefore be weighed against the inflation target and economic developments. 1  For a tool to be sufficient to meet the inflation target and attain a balanced development in economic activity, it is necessary for the economy to mostly suffer demand shocks, not supply shocks. This observation is sometimes called the divine coincidence, an expression coined by Blanchard and Gali (2007). 2  See the Riksbank (2013a) p. 3. 3  See Bill 1997/98:40, p. 54. 4  See, for example, the Riksbank (2013b).