monetary policy and the future of Cecilia Skingsley the - PowerPoint PPT Presentation

Post-pandemic monetary policy and the future of Cecilia Skingsley the policy-rate tool First Deputy Governor Nordea 7 October 2020

Policy rates at the lower bound 3 3 2 2 1 1 0 0 -1 -1 10 12 14 16 18 20 Sweden Euro area USA UK Sources: National central banks and the Riksbank

Inflation forecasts below target 3,5 3,5 3 3 2,5 2,5 2 2 1,5 1,5 1 1 0,5 0,5 0 0 10 12 14 16 18 20 22 24 UK, CPI USA, CPI Euro area, HICP Sweden, CPIF Note. Inflation refers to the CPIF, the HICP and the CPI. Annual data. Inflation forecast for Sources: BOE, ECB, Federal Reserve and the Riksbank USA refers to the median of the members of the FOMC's individual forecasts. The euro area’s inflation forecast refers to the forecasts by ECB and Eurosystem employees.

Downward trend for global interest rates 6 6 4 4 2 2 0 0 UK -2 -2 USA Euro area Sweden -4 -4 96 00 04 08 12 16 20 Note. Real government bond yields, 10-year maturity. Sources: National central banks and the Riksbank

Low neutral rate makes expansionary monetary policy more difficult Policy rate Actual policy rate Difficult to Neutral policy rate stimulate Time

Three central questions Is it good if the central bank Is it easier to counteract Is the policy rate higher on can counteract recessions recessions if the interest rate average if inflation in general with policy rate cuts? is normally somewhat higher is relatively high than if it is than if it is very low? very low?

Less monetary policy scope with lower inflation target Economic development Country with 2% inflation target Country with lower inflation target Policy rate Lower bound for the rate

Three central questions Is it good if the central bank Is it easier to counteract Is the policy rate higher on can counteract recessions recessions if the interest rate average if inflation in general with policy rate cuts? is normally somewhat higher is relatively high than if it is than if it is very low? very low? YES YES YES

The way forward • Communication of central importance • The inflation target is still our focus • Continued expansionary policy with possible modifications • More important role for fiscal policy • Conditioning of monetary policy a possible route? • Federal Reserve's strategy changes are interesting • Overshoot target if inflation has previously undershot – “Flexible Average IT” • Do not slow down too early in economic upturns

My most important messages • The inflation target will take longer to attain but is still our focus • Facilitates the distribution of resources through wage formation (easier to adapt relative wages) • Preserving effective interest rate tools is of central importance in stabilising economic activity • Fiscal policy needs to play a greater role in stabilisation policy • Central banks need to continue discussing and analysing strategy and frameworks • Federal Reserve's changes an important input