The proposed changes - introducing the previous 'policy variable' CPIF as the new target variable (target still 2%) and introducing a 'variation band' - will have no implications for the conduct of monetary policy.
As expected, CPIF is proposed as the new target variable to remove the direct effect that repo rate changes have had on CPI.
However, the Riksbank also proposes a +/- 1 percentage point 'variation band' around the 2% target. In our view, this is very similar to the old 'tolerance band' that was scrapped in 2010. The proposed band covers about two-thirds of the variance in CPIF since 1995. A minor difference to the old interval is that the Riksbank now says that the band-width at some point can be reassessed depending on the future variance of inflation. The reason for re-introducing it is to illustrate that monetary policy cannot operate with the precision to always keep inflation at the 2% target. The reason why the Riksbank chooses to call it a 'variation band' is that it is afraid that calling it a 'tolerance band' might be misinterpreted as implying stronger monetary policy action if the band is breached ('hard edges'). The 'variation band' is a way of expressing that that the edges are 'soft'.
The Riksbank has emphasised repeatedly that the proposed changes have no implication for policy making, so one might wonder why it bothered to make them.
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