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Riksbank Proposes Switching to Underlying Inflation Target
Riksbank Proposes Switching to Underlying Inflation Target

Riksbank Proposes Switching to Underlying Inflation Target

Riksbank Proposes Switching to Underlying Inflation Target

Sweden’s central bank on Tuesday proposed tweaking the way it targets inflation to set its sights on underlying rather than headline price rises and introduce a “tolerance band” around its 2% goal.

Riksbank policy has come under close scrutiny since the financial crisis, and while many central banks have struggled with low inflation, the Riksbank has undershot its target consistently since introducing it in 1995, Reuters reported.

The Riksbank’s proposals will affect the formal policy framework, but it said they would not have a direct impact on its policy decisions. “The changes now being considered will not entail any change to the monetary policy being conducted,” the Riksbank said.

In a widely expected move, the Riksbank said it was considering switching to a measure of underlying inflation for its target known as CPIF, a measure that already weighs heavily in its policy setting but which has not been a formal goal.

The Riksbank also said it was looking at reintroducing a variation band of 1 percentage point on either side of the target to illustrate that inflation cannot always be held exactly at 2%.

It removed a band in 2010 and some analysts have said reintroducing it could allow the Riksbank to tighten policy earlier. “If the market were to see this as the Riksbank being done with stimulus, then the crown could strengthen and the Riksbank wants to avoid that at all costs,” Nordea Chief Economist Annika Winsth said. “That is why the Riksbank is stressing that the focus is still 2%.”

Revising the inflation target will bring some clarity to a policy that many have seen as confusing—the official target has been headline consumer prices, but the Riksbank has long said it looks more closely at CPIF and has even given prominence to CPIF excluding energy prices.

Targeting CPIF, which strips out the effect of interest rate changes, will also stop the Riksbank perception the central bank is chasing its own tail. But it will not solve the problem of inflation itself.

Wage rises—a key element in inflation—are likely to remain subdued while globalization and digitalization seem to be keeping price pressure low across much of the world.

Even extreme monetary policy, including negative rates and a chunky program of buying bonds, has yet to push price rises up sustainably to a rate of 2%.

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