Weaker growth implies a diminishing risk of inflationary impulses from demand, which normally warrants a less restrictive monetary stance. Conversely, demand that is excessively strong in relation to potential output implies a risk of rising inflation and a need to raise the repo rate. The current discussion seems to be about whether the Riksbank acts symmetrically. In other words, is the Riksbank as concerned about under-shooting the inflation target as it is about preventing inflation from exceeding the target? My answer to that question is definitely “Yes”. The Riksbank aims to keep the rate of inflation at 2 per cent, neither more nor less. The issue of monetary policy asymmetry seems to be linked mainly to two matters. One is the question of monetary policy’s central concern. Is this inflation’s prevailing rate or the rate that assessments point to one to two years ahead? The answer is that the Riksbank is guided by the assessment of future inflation. If inflation is currently running at 2 per cent and the predicted rate (based on an unchanged instrumental rate) one to two years ahead is, say, 1 per cent, then the instrumental rate should be lowered. The reason for this is quite simply that monetary policy acts with a time lag of one to two years. Using the prevailing rate of inflation as a guide would involve adjusting the instrumental rate more frequently and markedly, thereby entailing undesirable economic instability. But how can we be sure that the assessments are always correct? Of course we cannot.
Mr. Bäckström reports on inflation and the interest rate in Sweden Speech by the Governor of the Bank of Sweden, Mr. Urban Bäckström, at a conference organised by the Stockholm Chamber of Commerce and Veckans Affärer in Stockholm on 27/1/98. Thank you for the invitation to talk at this conference about the outlook for inflation and the interest rate. It is now five years since the inflation target was instituted; so before considering the current situation for monetary policy, I should like to say something about the intervening period. Five years with an inflation target In January 1993 the Riksbank’s Governing Board decided to adopt an explicit target for inflation and specified that as of 1995 and measured in terms of the consumer price index, the rate of inflation was to be limited to 2 per cent, with a tolerance interval of ±1 percentage point. The commitment to an inflation target originated from the Riksbank but both the Government and the Riksdag (Sweden’s parliament) expressly support monetary policy’s focus on price stability as well as the inflation target. Last year five of the political parties in the Riksdag agreed that the Riksbank’s objective, to safeguard the value of money, should have the force of law; a Government bill with provisions to this effect was presented to the Riksdag in November. In recent years, monetary policy’s commitment to low inflation has thus been established increasingly firmly.