Stefan Ingves: Monetary policy challenges - weighing today against tomorrow

Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, to the Swedish Economic Association, Stockholm School of Economics, Stockholm, 16 May 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I'd like to begin by thanking you for the opportunity to come here to the Swedish Economics Association. As many of you know, this is a tradition, and today's speech is my twelfth in a row. I have always appreciated the opportunity to come here and discuss both current issues and long-term themes of more fundamental significance for the Riksbank's operations.

Today's speech is about monetary policy and its challenges in a slightly longer perspective. But before broaching that subject, I would first like to comment on the news item published by the Riksbank this morning. In brief, it states that the Executive Board is considering switching over to a new target variable, the CPIF, this autumn, and introducing a 'variation band' to illustrate uncertainty over the development of inflation.

Ever since the inflation target was introduced nearly 25 years ago, it has been defined as the annual change in the consumer price index, the CPI. However, in recent years, the CPI has become increasingly difficult to use as guidance for monetary policy. The reason for this is that adjustments to the policy rate have large and direct effects on the CPI which are not connected to underlying inflationary pressures and which are also counter-productive. This means, for example, that interest rate cuts, which are intended to bring inflation up, instead further lower CPI inflation over the short term as the costs for mortgages fall. For this reason, the CPIF, i.e. the CPI with a fixed interest rate, has increasingly acted as guidance for monetary policy. But large variations in the CPI in recent years, due to adjustments to the policy rate, have sometimes led to problems in communication. By switching to the CPIF, we are making monetary policy clearer