In a speech today, Riksbank deputy governor Per Jansson discussed possible adjustments of the policy framework for monetary policy. He more or less rejected any major changes of the current framework, which has served the economy well for many years but was open for some adjustments.
What attracted most attention was his remarks regarding a reintroduction of the interval (2% +/-1 percentage point) that was in place until 2010. Judging by the market reaction, this was interpreted as a sign that the hitherto 2%-fixated Jansson might be getting less anxious to bring inflation back to 2%. The FRA curve Dec-15 - Dec 17 steepened by around 2bp and Swedish bonds underperformed Germany. Provided that Jansson actually said what was in the published speech, we doubt this was his intention.
To start with, Jansson explained that the previous interval was introduced as a means to illustrate that it is impossible to keep inflation at exactly 2% all the time - monetary policy requires some flexibility. After several years, the Riksbank has drawn the conclusion that this had become so well established that the interval no longer served any purpose. Now Jansson is less certain that removing the interval was so unproblematic.
So, what about reintroducing an interval? Jansson points out that the interval in use until 2010 was a tolerance band, i.e. a tool to show that the Riksbank must accept certain, but not too large, deviations from the very target of 2%.
Then, Jansson says that 'a number of commentators' seem to advocate a different approach, namely something that can be described as a target range. In other words an interval where the target itself is 2 percentage points wide, not an exact figure. In other words, a policy framework where inflation just above 1% or just below 3% should be equally tolerable as 2%. Observe that 'certain commentators' suggest people outside the Riksbank do not get the impression that such a target range is necessarily Janssons preferred option.
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