A more expansionary monetary policy At the start of 2015, we thus found ourselves in an unusual situation with a series of circumstances that suggested that monetary policy needed to be more expansionary: declining confidence in the inflation target, the measures adopted by the ECB to weaken the euro, the risk that the falling oil price would put further pressure on inflation expectations and increased uncertainty over international developments. Consequently, there was a need to strengthen confidence in the inflation target through clear signals of the Riksbank’s ability and willingness to bring inflation back to the two per cent target in a controlled form. We needed to clarify and practically demonstrate that monetary policy had more to give. The repo rate was already at a historically-low zero per cent and even the interest rates we sometimes call the final interest rates – that is, those actually paid by households and companies – were at historically low levels. But interest rates needed to be even lower and we needed to counteract the increasingly rapid appreciation of the krona. Negative interest rate? The most obvious measure was to cut the repo rate further, that is to make it negative – to introduce what, in everyday parlance, was starting to be called a negative interest rate. When we cut the repo rate to zero per cent, we did not observe any major problems.
We also noted an unusually low interest among companies in raising their prices, despite rising costs. Conceivable explanations for this included decreasing inflation expectations and perceived uncertainty over the economic outlook, as reported by the companies in our Business Surveys.2 The unusually low inflation in recent years is something we have shared with many other countries. This may have strengthened the perception that there are forces in motion making it impossible for the Riksbank to reach the inflation target. There has been, not least, an emphasis on the effects of globalisation and digitisation on costs and competition. However, as my colleague in the Executive Board, Martin Flodén, pointed out in a speech last autumn, it is difficult to see why this should have persistent effects on the rate of inflation in particular and why it has not prevented higher inflation in countries like Norway, Canada and Australia.3 In addition, these factors were relevant when Sweden had a higher rate of inflation, just a few years ago. Regardless of the underlying reasons, it would be very unfortunate if long-term inflation expectations were to drift away from the inflation target. We would then start to lose everything we gained by having an inflation target. Inflation prospects are influenced by international developments At the same time, at the start of 2015, the European Central Bank (the ECB) had announced bond purchases in an amount of EUR 60 billion per month to make its monetary policy more expansionary.