Review of the Riksbank’s Monetary Policy

2010-2015

Marvin Goodfriend

Mervyn King

ISSN 1653-0942 978-91-87541-39-1 Riksdagstryckeriet, Stockholm, 2015

2015/16:RFR7

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Foreword

As part of the follow-up and evaluation by the Riksdag, the Committee on Finance of the Riksdag commissions an external and independent review of Swedish monetary policy every four years. Two reviews have been carried out thus far. The first was performed by Professors Francesco Giavazzi and Frederic Mishkin and covered the period of 1995–2005 (2006/07:RFR1). The second was performed by Professors Charles Goodhart and Jean-Charles Rochet and covered the period of 2005–2010 (2010/11:RFR5).

In June 2014, the Committee on Finance decided to commission a new, third review of the monetary policy for the period of 2010–2014. In conjunction, the Committee appointed Mervyn King, former Governor of the Bank of England (2003–2013) and Professor Marvin Goodfriend of Carnegie Mellon University, to jointly carry out the evaluation. Mervyn King and Marvin Goodfriend have chosen to extend the period of evaluation to include the developments during most of 2015.

The focus of the new review is on reviewing and analysing the setting of Swedish monetary policy during the relevant period, the balancing of various risks against one another, the work of the Riksbank Executive Board, the formulation of the inflation target and the Riksbank’s forecasting activities (the directive is explained in greater detail in an annex to the report).

Mervyn King and Marvin Goodfriend began their work in January 2015 and have visited Sweden several times over the last year to gather information and discuss Swedish monetary policy and financial stability with various persons involved. Among others they have met with representatives of the Riksbank, the Riksbank General Council, the Riksdag, Riksrevisionen (the Swedish National Audit Office), the social partners in the labour market, Finansinspektionen (the Swedish Financial Supervisory Authority), academia and the banks. Economist Christian Nilsson acted as evaluation secretary for King and Goodfriend.

The results of the review are presented in this report from the Riksdag. The Committee on Finance hopes that the review will further stimulate the already lively debate on Swedish monetary policy and provide a valuable contribution to the future setting of the monetary policy. The Committee on Finance will be circulating the review to various consultation bodies during spring 2016 and will thereafter present a report on the evaluation and the consultation responses to the Chamber of the Riksdag.

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1 Executive Summary

In 2014 we were invited by the Committee on Finance of the Riksdag to conduct a Review of the performance of the Riksbank over the period 2010 through 2014. Our Review is wide-ranging, covering both monetary policy and financial stability, the structure, transparency and accountability of the Riksbank, and the relationship between the Riksbank and other official bodies concerned with economic policy, especially in the area of financial stability.

Following the global financial crisis in 2007-09, the Swedish economy started to recover rather quickly. Interest rates, having been cut sharply during the crisis, were raised slowly in 2010 and 2011. Subsequently, this tightening of monetary policy proved highly controversial. That debate is at the heart of our Review. When assessing the rights and wrongs of monetary policy decisions, it is important not to make judgements with the benefit of hindsight. Our Review sets out to analyse and discuss the decisions that were made in the light of the information available to participants at the time.

Following the traumatic experiences of the early 1990s, with the banking collapse and sharp depreciation of the krona, the subsequent period of monetary policy has been one of remarkable success under at times difficult circumstances. The Riksbank was asked to achieve stable prices, and in large part it has done exactly that. It is clearly a success compared with most previous policy regimes in Sweden. The fact that today small deviations of consumer price inflation from its 2% target are seen as a failure is testimony to earlier success and evidence of a misplaced degree of hubris in expectations of the ability of any central bank to control the economy.

During the period covered by our Review, there were serious divisions among the Executive Board of the Riksbank. We comment below on the positions taken and their respective merits. The issues that divided the Board were major intellectual challenges thrown up by the global financial crisis and its aftermath, albeit it is fair to say that the Riksbank was confronted with even bigger challenges than were faced by other central banks. Around the world, central banks are debating the appropriate objective of monetary policy and no international consensus has yet been reached. The experience of Sweden is of importance to the rest of the world as well as to its own citizens.

Prior to the global financial crisis of 2007-09, the Swedish economy appeared in good shape. Growth and inflation were performing satisfactorily, there was a sound banking system, the fiscal position was strong, and in terms of conventional macroeconomic indicators there seemed no obvious problem on the horizon. But underneath this apparently calm surface, as with other major economies, tensions were growing. House prices and mortgage debt were rising rapidly at double digit rates, there was a growing maturity and currency mismatch in the banking system, and the trade surplus was unsustainably high. When the crisis intensified in the fall of 2008, Sweden was

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path. On the other hand, the lack of market credibility in the Riksbank’s published repo rate path made it increasingly difficult to attribute bad outcomes to an overly tight monetary policy when market expectations were of a continuing lower repo rate. The one conclusion that can safely be drawn is that forecasts, and policy, should not be based solely on forecasts from a model that assumes full credibility in the stated policy path. There must be room for judgement about the credibility of the inflation target and the path of policy.

Third, it is striking that all members of the Executive Board devoted so much time to thinking about the future path of the repo rate and to providing guidance as to their views on how it should evolve over the following three years. There is something surreal about the precision of the guidance provided by individual board members as to the future path of the repo rate when contrasted with the sheer uncertainty about the future and the fact that markets took rather little notice of the published path in determining their own expectations. It became too easy to paper over major differences of view on the current stance of policy by expressing them in terms of differences of view about the likely future path of the policy rate. We recommend that the Riksbank should conduct and publish (i) a review of its experience with the announcement of a future path for the repo rate, and (ii) a post-mortem on the substantial deviation of market expectations from its published forecasts during the period covered by this Review.

Fourth, there was heavy reliance, among both the majority of the Board and the dissenters alike, on forecasts produced by models developed by Riksbank staff. Although such models are useful in putting together consistent quantitative forecasts, inevitably they are based on strong assumptions and can act as no more than a starting point for a discussion of the challenges facing monetary policy at any particular juncture. They cannot be used mechanically. At no time was this note of caution about the use of models more relevant than in the immediate aftermath of the global financial crisis. Models that not only didn’t, but couldn’t by their nature, predict the crisis were unlikely to tell the whole story of the difficulties facing economies during the recovery phase. A greater degree of humility about those models would have been appropriate. The minutes of the Monetary Policy Meetings reveal remarkably little challenge to the results from model simulations from either the majority or minority members of the Board. One important failing of the models used was the assumption of complete credibility in the willingness and ability of the Riksbank to hit the 2% inflation target. The forecast of inflation always returned to 2% over the medium term. The presumed credibility of the inflation target gave the Executive Board a false sense of confidence in its own strategy which encouraged a belief that persistent departures of inflation below 2% could not undermine credibility in the target. By 2015 that confidence was being sorely tested. An important role for members of the Executive Board is to challenge the assumptions of models used to generate quantitative forecasts so that there can be a full discussion of all relevant aspects of the outlook before members reach their policy judgements.

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such differences of view. Explanations of those differences are essential to the promotion of greater understanding among the wider public of the challenges facing monetary policy. It is evident from the minutes and public comments made by members of the Board that respect for others’ viewpoints was not always present during the period covered by our Review. The extent of divisions, and in particular the way they were expressed, was damaging to the reputation of the Riksbank. Members of the Board must remember that their role is to present coherent arguments in a reasonable and persuasive fashion. If they use language which is designed to attack other members of the Board the public standing of the Board is damaged. It was not helpful that minutes and interviews by Board members displayed a degree of brusqueness uncharacteristic of normal public debate in Sweden. Compared with the early years of Monetary Policy Meetings, the minutes during much of the Review period became extremely long and contained mainly the views of dissenters, the majority view being expressed in the regular Report. The minutes no longer represented a to-and-fro between different viewpoints on the Board, and did not reflect the balance of discussion. It is not helpful for the majority and minority to express their views in differing formats. There needs to be a degree of collective discipline in how the minutes are produced. The minutes should cease to be a detailed and uneven record of submissions by individual members and should contain a more balanced explanation of the decision reached by the majority and the arguments against that put forward at the meeting by the dissenting minority.

The full list of our fifteen recommendations is contained in Chapter 2.

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2 List of Recommendations

We list below our recommendations under four subject headings:

Monetary Policy:

1.The Riksdag, on a recommendation by the Finance Minister, should specify the inflation target, in terms both of its definition and its numerical value, and should delegate that objective to the Board of the Riksbank to achieve. At present, we recommend a target of 2% a year as measured by CPIF. The target should be reviewed every ten years unless the Riksdag legislates to change the target earlier than the next due review date.

2.The mandate given by the Riksdag to the Riksbank should state that the monetary policy objective of the Riksbank shall be to maintain price stability, as defined by the inflation target, with regard to the long run sustainability of the path for the level and composition of output and its implications for inflation. Where, in the opinion of the Executive Board, it is appropriate to deviate for a while from targeting inflation some two years ahead, the Riksbank shall explain its reasons and defend them in front of the Finance Committee of the Riksdag.

3.The Riksbank should re-examine its methods for producing forecasts for both the world economy and overseas interest rates to help the Executive Board focus on the big issues surrounding the outlook. The Monetary Policy Report should explain in more detail the basis for the assumptions about overseas growth and interest rates.

4.The Riksbank should conduct and publish (i) a review of its experience with the announcement of a future path for the repo rate, and (ii) a postmortem on the substantial deviation of market expectations from its published forecasts during the period covered by this Review.

5.As a matter of course the Riksbank should publish in its Monetary Policy Reports an analysis of why in its view there is a divergence between its published repo rate path and market expectations of the repo rate path, and what implications it believes any such divergence has for the setting of monetary policy.

6.The Sveriges Riksbank Act should be amended to make clear that the choice of exchange rate regime is a matter for government, and that the mandate to meet the inflation target is subject to the Government deciding that the exchange rate should float freely.

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Financial Stability:

7.The Government should ensure without further delay that Finansinspektionen has the legal powers and range of macro-prudential instruments appropriate to its role in promoting financial stability.

8.That a joint Prudential Policy Committee (PPC) of the Riksbank and Finansinspektionen be established to meet quarterly to discuss the setting of the main macro-prudential policy instruments. The PPC should make recommendations to the Riksdag from time to time on whether the set of instruments delegated to Finansinspektionen should be expanded or contracted. The PPC should be the primary source of reports on financial stability and should appear before the Finance Committee at least once a year.

9.The Sveriges Riksbank Act should be amended to clarify the role of the Riksbank in financial stability, whether limited to participation in the proposed Prudential Policy Committee (see above) or more extensive if macro-prudential powers gravitate to it. The mandate of the Riksbank should include financial stability, and the Riksbank must have some formal powers to enable it to achieve its objective.

10.In 2020 the Government should ask a small group of experts to carry out a review of the allocation of responsibility for macro-prudential policy between Finansinspektionen and the Riksbank.

Accountability of the Riksbank:

11.The Finance Committee of the Riksdag should hold three sessions of evidence a year with the Riksbank Executive Board following publication of the Monetary Policy Reports. In addition to the Governor (each time), three deputy governors should appear so that each member of the Board would appear at least twice in any twelve-month period to explain and defend his/her votes on monetary policy decisions.

12.The minutes should attempt to record the differing points made at the meeting and not a sequence of individual formal presentations. Longer analyses by particular members should be made available publicly in speeches.

13.The Riksbank should augment the current minutes with minutes of the meetings where the Main Scenario is decided – at the First or Second Large Monetary Policy Group Meetings and also the Executive Board Forecast Meeting. Those minutes could then be released to the public together with the current minutes two weeks after the Monetary Policy Meeting.

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Organisation of the Riksbank:

14.The Executive Board should become the Monetary Policy Board comprising three executive members of the Riksbank, the Governor and two deputy governors with responsibility for monetary policy and financial stability respectively, and three non-executive members.

15.The Finance Committee of the Riksdag should invite the General Council of the Riksbank to submit recommendations for amendments to the Sveriges Riksbank Act.

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3 Introduction

In 2014 we were invited by the Committee on Finance of the Riksdag to conduct a Review of the performance of the Riksbank over the period 2010 through 2014. The terms of reference of our Review are set out in Annex 1. As the Review progressed, and we took evidence from a large number of witnesses, it became clear that we could not ignore developments in the period immediately prior to 2010, which included the global financial crisis, nor to overlook the significant developments in monetary policy during 2015. Our Review is wide-ranging, covering both monetary policy and financial stability, the structure, transparency and accountability of the Riksbank, and the relationship between the Riksbank and other official bodies concerned with economic policy, especially in the area of financial stability.

The Review started its work in January 2015 and was submitted to the Riksdag at the end of November 2015 for translation into Swedish. We are grateful to the Committee on Finance of the Riksdag, and to Pär Elvingsson of its Secretariat, for their help and cooperation in providing us with the facilities required to conduct this Review. We are particularly indebted to Christian Nilsson of the Riksbank who was seconded to work with us during 2015. His help in guiding us through the maze of documents relevant to our Review and in organising our visits to Stockholm in order to interview the relevant participants went beyond the call of duty. His wise guidance, good humour and counsel were immensely valuable, but he should not be held responsible for any of the observations and conclusions set out below.

We visited Stockholm three times for several days each in order to conduct interviews with all the relevant participants both at the Riksbank and elsewhere. We interviewed every member who served on the Board of the Riksbank during the period 2010-15. We also interviewed members of Finansinspektionen (the Swedish Financial Supervisory Authority), a number of independent economists, and others with views and experience of monetary policy in Sweden. A complete list of those whom we met is set out in Annex 4.

Following the global financial crisis in 2007-09, the Swedish economy started to recover rather quickly. Interest rates, having been cut sharply during the crisis, were raised slowly in 2010 and 2011. Subsequently, this tightening of monetary policy proved highly controversial. That debate is at the heart of our Review. When assessing the rights and wrongs of monetary policy decisions, it is important not to make judgements with the benefit of hindsight. Our Review sets out to analyse and discuss the decisions that were made in the light of the information available to participants at the time. In so doing, we discuss in detail the views of members of the Board of the Riksbank as they evolved from meeting to meeting in the light of the information available to them.

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ous policy regimes in Sweden. The fact that today small deviations of consumer price inflation from its 2% target are seen as a failure is testimony to earlier success and evidence of a misplaced degree of hubris in expectations of the ability of any central bank to control the economy.

Second, during the period covered by our Review, there were serious divisions among the Executive Board of the Riksbank. We comment below on the positions taken and their respective merits. The issues that divided the Board were major intellectual challenges thrown up by the global financial crisis and its aftermath, albeit it is fair to say that the Riksbank was confronted with even bigger challenges than were faced by other central banks. Around the world, central banks are debating the appropriate objective of monetary policy and no international consensus has yet been reached. The experience of Sweden is of importance to the rest of the world as well as to its own citizens.

Finally, in conducting our Review, we were at all times impressed by the quality of intellect, experience, seriousness and open-mindedness of the people with whom we spoke, both at the Riksbank itself and elsewhere. Sweden can be proud of its central bank and the quality of people who choose to work for it. The qualities we observed reflect well, not only on the Riksbank and other public bodies, but on the country itself.

Marvin Goodfriend

Mervyn King

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4 The Swedish Economy and Monetary Policy Prior to 2010

Prior to the global financial crisis of 2007-09, the Swedish economy appeared in good shape.3 Growth and inflation were performing satisfactorily, there was a sound banking system, the fiscal position was strong, and in terms of conventional macroeconomic indicators there seemed no obvious problem on the horizon (see Table 1). But underneath this apparently calm surface, as with other major economies, tensions were growing. House prices and mortgage debt were rising rapidly at double digit rates, there was a growing maturity and currency mismatch in the banking system, and the trade surplus was unsustainably high. When the crisis intensified in the fall of 2008, Sweden was strongly affected. GDP fell by 6% from 2008/Q3 to 2009/Q3. But following the sharp downturn there was a strong rebound in 2010, more so in Sweden than in most other countries.

The history of the period before our review period is well covered in the two previous evaluations of the Riksbank’s performance by Giavazzi and Mishkin and by Goodhart and Rochet, but we provide a brief overview of macroeconomic developments in Sweden prior to 2010, previewing briefly how macroeconomic conditions ultimately developed to 2015. During the earlier period there were important reforms involving the implementation of monetary policy. In particular, in February 2007 the Riksbank began to publish at each policy meeting its own expected future path for its official interest rate (the repo rate). We summarize briefly how the publication of the repo rate path worked in practice from 2007 to 2009. We then briefly review the record from 2006 through 2009 of reservations (dissents) entered by members of the Executive Board against the Riksbank's policy actions to provide perspective on the degree of contentiousness of policy actions on the Board prior to the period of our evaluation.

4.1 Macroeconomic Developments in Sweden

GDP growth averaged around 3.5% per annum from 2005 through 2007 and the unemployment rate fell from nearly 8% to 6%, although annual CPIF inflation (excluding the direct effects, through mortgage rates, of the Riksbank’s repo adjustments on CPI) was below the Riksbank 2% inflation target, lying between 1% and 1.5% from 2005 through the first half-year of 2007 (see Figures 2 - 4). The Riksbank raised the repo rate (see Figure 1) steadily from 1.5% in June 2005 to 3.5% in June 2007, reaching 4.75% on the eve of the September 2008 crisis, as CPIF inflation rose from 1% in August 2007 to 3.5% one year later and higher inflation expectations threatened to take trend inflation above the 2% inflation target .

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The September 2008 global financial crisis led to a sharp fall in the demand for Swedish exports. After growing at a 7% annual rate from 2005 through 2007 and early 2008, exports fell at a 24% annualised rate in the fourth quarter of 2008 and at a 30% annualised rate in the first quarter of 2009, and ultimately contracted by around 15% in 2009 over 2008. As a result, GDP fell by 0.6% in 2008 and at an astounding 14% annualised rate in the last quarter of 2008. In the first quarter of 2009, GDP continued to fall at a 10% annualised rate and contracted by 5% in 2009 over 2008. The consequence was that the unemployment rate rose from 6% in mid-2008 to nearly 9% by the end of 2009. Nevertheless, CPIF inflation averaged around 2% for 2009, in part due to the sharp depreciation in the exchange rate precipitated by the international crisis and the aggressive easing of monetary policy in Sweden. The krona had fallen some 30% against the euro by early 2009 before settling around 10 SEK/euro after mid-year and it depreciated by 50% against the US dollar. In terms of the trade-weighted (KIX) index, the krona depreciated by close to 20% between mid-2008 and March 2009 (see Figure 5).

The Riksbank cut the repo rate aggressively from 4.75% to 0.25% in a series of five steps starting with an 8 October 2008 intermeeting action (in concert with the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank), reaching 1% in February 2009, and concluding with a 0.25% cut to 0.25% in July 2009.

The Riksbank, other Swedish authorities and the Government, responded to help offset the negative effects of the financial crisis on liquidity and credit spreads in Sweden. The Riksbank offered loans in Swedish krona from three months to one year to facilitate banks’ longer-term funding. Swedish banks had become heavily dependent on short-term US dollar wholesale funding of longer-term assets. Private dollar funding contracted sharply in the wake of the crisis. The Riksbank responded by lending US dollars to the banks partly funded by the Riksbank's foreign currency reserves and more importantly by a US dollar loan facility unprecedented in breadth and scale offered by the Federal Reserve to the Riksbank and other central banks.

The demand for Swedish exports bounced back remarkably in 2010, growing by 12% due to the resurgence in global activity and world trade, and the effect of the krona depreciation. Stimulated by the strength in exports, Swedish GDP reversed its contraction in 2009, expanded by 6% in 2010, and pulled the unemployment rate down from 9% to 8%. CPIF inflation continued to run near the 2% inflation target in 2010. The strong recovery in conjunction with inflation at the target led the Riksbank to raise the repo rate in seven steps from 0.25% in June 2010 to 2% in July 2011.

During the summer and autumn of 2011 concerns over sovereign debt in the United States and particularly in the euro area caused trade and growth prospects to deteriorate in Sweden. Swedish GDP growth slowed to 2.7% in 2011 as growth of exports slowed to 6%. Unemployment bottomed out at 7.5%. And CPIF inflation fell sharply below the 2% target during 2011, to

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4.2 Dissents by Members of the Executive Board

Disagreements among the Executive Board were common prior to the period covered by our review. Although there were no dissents in 2006, there were six in 2007, eight in 2008, and no fewer than fourteen in 2009.4 In 2007, one member of the Board dissented five times and another dissented once, both voting to tighten monetary policy more aggressively than the majority. From February to September 2008 two members dissented on three occasions each, and a third member dissented twice, all voting for easier monetary policy than the majority. The greatest challenge to the majority led by the Governor during the entire period from 2006 through 2009 was in July and September 2008 when three members of the Board voted for easier policy and the majority carried the day only because the Governor exercised his casting vote.

The Executive Board acted unanimously to ease monetary policy aggressively following the September 2008 crisis at the four meetings from October through February 2009. But the disagreements reappeared in April 2009. One member dissented for easier monetary policy at all five remaining meetings in 2009, wishing in April to cut the repo rate by 75 instead of 50 basis points and then to hold the repo rate at 25 basis points until mid-2011, and in July wishing to cut the repo rate to zero instead of 25 basis points and keep it there for one year. Another member dissented on four occasions in 2009 and a third member dissented on three of those occasions, both voting for the repo rate to be raised sooner than expected by the path described in the Monetary Policy Re- port. Even though 2009 saw 14 dissents against the Executive Board majority compared to only eight in 2008, the challenge to the majority was never as great as in 2008 because there were dissents for both easier and tighter monetary policy relative to the majority.

4.3 Previous Reviews

Giavazzi and Mishkin evaluated the first period of inflation targeting in Sweden, which began in January 1993 shortly after Sweden floated the krona in the fall of 1992. Fortunately for Sweden, underlying economic conditions were relatively benign during the initial period of inflation targeting, coming as it did after the Swedish banking crisis in the early 1990s and before the

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global financial turmoil in 2007-09. Giavazzi and Mishkin assessed the implementation of inflation targeting in Sweden in large part from the perspective of the academic literature, in terms of its success in stabilizing inflation, and in light of the Riksbank Act of 1999 which gave the Riksbank the independence to maintain price stability.

Covering the period of the global financial collapse, the second evaluation by Goodhart and Rochet described in detail the nature of the financial crisis itself, Sweden’s vulnerability to the crisis, and the variety of extraordinary measures taken by the Riksbank to stabilize the Swedish economy in response to the crisis. Rochet and Goodhart assessed the capacity of the Riksbank and other government authorities in Sweden to maintain financial stability in light of the crisis. Their predominant concern was that the Riksbank’s responsibility for financial stability in the 1999 Act was unclear; and moreover, the Government had not authorized the Riksbank or other financial regulatory agencies to pursue macro-prudential policies needed to guarantee financial stability.

Our review differs from the earlier ones in that by 2010 the global financial crisis had passed and Swedish exports began to recover rapidly. Moreover, the Riksbank had accumulated two decades of experience with inflation targeting and with that a degree of confidence in its management of monetary policy. Nevertheless, a number of difficult underlying economic conditions would test severely the framework within which the Riksbank conducted monetary policy. First, Swedish housing prices and household indebtedness continued to rise throughout the period of our evaluation (see Figures 6 and 7), posing a threat to financial stability. And the Government failed to remedy deficiencies in the regulatory framework to secure financial stability. Second, sluggish growth in the United States and especially in Europe, slowed the expansion in Sweden and forced inflation significantly and persistently below the 2% target. Third, by the end of our evaluation period, the Riksbank was forced to deal with the zero lower bound constraint on its official short-term interest rate.

There was no road map for how the Riksbank should have handled these nearly unprecedented circumstances. The Executive Board and the Monetary Policy Department were learning by doing, so to speak. So we base our evaluation of the Riksbank’s monetary policy during the period on how the Executive Board handled these unexpected developments in real time as recorded in the Monetary Policy Reports and Minutes of the Monetary Policy Meetings.

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5 The Evolution of Monetary Policy 2010-

2015

Chapter 4 described the performance of the Swedish economy during the crisis and in the run-up to the period of our Review. The combination of rising asset prices and debt, on the one hand, and the weakness of the world economy, on the other, posed major challenges to economic policy in general, and to monetary policy in particular. As we stressed in the introduction, it is sensible to judge policy not with the benefit of hindsight but in terms of the information that was available at the time. It is important not to be misled by any subsequent attempt to rewrite history. So now we turn to an analysis of what the Riksbank knew meeting by meeting and how the reasoning for its monetary policy actions evolved over time. Before that, however, we describe the monetary policy framework – both the strategy (section 5.1) and the process (section 5.2) – governing the Riksbank’s decisions on monetary policy.

5.1 Monetary Policy Strategy

The monetary policy strategy includes the objectives of policy and the judgements about the economy which determine decisions on official interest rates and other policy instruments. The Riksbank's publication Monetary Policy in Sweden (2010, pp. 5-6) summarizes its monetary policy strategy as follows (quotations taken from the document):

“According to the [1999] Sveriges Riksbank Act, the objective for monetary policy is to maintain price stability. The Riksbank has specified this as a target for inflation, according to which the annual change in the consumer price index (CPI) is to be 2 percent”. CPI inflation includes the impact of changes in interest rates on the imputed cost of owner-occupied housing. A measure of inflation excluding this impact of changes in interest rates is described as CPIF inflation. When interest rates rise to dampen demand and ultimately inflation, the initial impact is to push up CPI inflation. To counter this perverse effect, in its policy deliberations, the Executive Board consistently employs CPIF rather than CPI as the measure of inflation guiding policy.

Monetary policy also aims “to support the objectives of general economic policy with a view to achieving sustainable growth and high employment”. So in addition to stabilising inflation around the inflation target, the Riksbank also tries to “stabilise production and employment around long-term sustainable paths. The Riksbank therefore conducts what is generally referred to as flexible inflation targeting”.

To meet its objectives the Riksbank sets official interest rates at its regular monetary policy meetings (held six times a year). The official interest rate is known as the repo rate or “reporäntan”. The repo rate is the interest rate at which banks can borrow or deposit money for a period of 7 days with the

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Riksbank. By altering the level of the repo rate the Riksbank can exercise influence over the interest rates that banks apply to loans, mortgages and savings accounts, and so on the amount of money and credit in the economy. More recently, when the repo rate had fallen to zero, and in 2015 turned negative, the Riksbank has bought securities in financial markets in order to inject more money into the economy.

Because it takes time before monetary policy has its full impact on inflation, monetary policy is guided by forecasts for the economy and inflation. In addition, the Riksbank publishes, among other things, its own assessment of the likely future path for the repo rate and the degree of uncertainty surrounding that path. This interest rate path “is a forecast, not a promise”. In connection with every monetary policy decision, “the Executive Board makes an assessment of the repo-rate path needed for monetary policy to be well-balanced. A well-balanced monetary policy is normally a question of finding an appropriate balance between stabilising inflation around the inflation target and stabilising the real economy”.

The Riksbank began to publish after each monetary policy meeting its own expected repo rate path over a three-year forecast horizon in February 2007. It also began to prepare its forecasts on the basis of its own published expected repo rate path, rather than conditioning them on forward short-term interest rates derived from the money market yield curve. At the same time, it renamed its Inflation Report the Monetary Policy Report. In a 17 January 2007 speech, Deputy Governor Irma Rosenberg, explained that “…the primary reason for publishing one's own interest rate forecast is that it makes it easier for the central bank to steer expectations. With this assumption for the interest rate, the central bank can explain more clearly to the general public and the financial markets how it envisages future interest rate developments and how it reasons when making monetary policy”. As we discuss below, the question of how successfully the published repo rate path steered market expectations proved to be a highly problematic factor in making forecasts and setting interest rates.

A major challenge facing any central bank is how quickly it tries to correct any deviation of inflation from target. In Sweden, “[t]here is no general answer to the question of how quickly the Riksbank aims to bring the inflation rate back to 2 per cent if it deviates from the target. A rapid return may in some situations have undesirable effects on production and employment, while a slow return may have a negative effect on confidence in the inflation target. The Riksbank's ambition has generally been to adjust the repo rate and the repo rate path so that inflation is expected to be fairly close to the target in two years' time”.

According to the Sveriges Riksbank Act, the Riksbank tasks also include promoting a safe and efficient payment system. During the period covered by the Review, the Riksbank also became concerned about developments in house prices and household debt. Official responsibility for such matters lay primarily with the regulatory authorities and not the Riksbank. We describe below how such concerns affected monetary policy and comment in Chapters

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5.2 The Monetary Policy Decision-making Process

The Riksbank holds six “Monetary Policy Meetings of the Executive Board” each year at which it makes decisions regarding the repo rate. A Monetary Policy Report is prepared for the February, June/July, and October meetings, which includes a main scenario for monetary policy favoured by the majority of the Board and a variety of alternative scenarios; a Monetary Policy Update without alternative scenarios is produced for the other three meetings.5 The interest rate decision is announced at 9:30 am the following day, along with the votes of individual members of the Executive Board, and the Monetary Policy Report or Update is posted on line to provide more detail on the policy decision. The Governor also hosts a press conference. Minutes of the Monetary Policy Meetings with attribution (ascribing all statements and comments to individual members of the Board) are published about two weeks after each policy meeting.

According to Hallsten and Tägtström (2009), the material for each Monetary Policy Meeting of the Executive Board is produced in a series of premeetings that usually takes about six weeks (the time line of the process that culminates in the Monetary Policy Meeting is shown in Figure 8).6 Board members already participate in the first pre-meeting, which begins to develop alternative scenarios based on different views for economic growth abroad, productivity growth, oil prices, and/or other conditioning variables.

The initial pre-meeting is followed by a number of meetings at which new statistics and new events that have occurred since the previous Monetary Policy Meeting of the Executive Board are presented and discussed. Of particular importance for a small open economy such as Sweden, there is an international outlook meeting which develops preliminary forecasts of international variables such as economic growth and interest rates abroad upon which the forecast of developments in Sweden will be conditioned. Forecasts from bodies such as the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) are also presented. There is also a financial market meeting and a meeting to ascertain the current state of the Swedish economy. Next, the Monetary Policy Department employs its structural “Ramses” model of the Swedish economy and statistical VAR methods to formulate its forecast of key macroeconomic variables in Sweden such as inflation, interest rates, GDP, unemployment, and exchange rates based on exogenous conditions such as the forecast for developments abroad.

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Following these introductory meetings, there is “the first large monetary policy group meeting,” whose purpose Hallsten and Tägtström describe as follows:

“The aim of the first large monetary policy group meeting is to attempt to clarify for the Executive Board what forecasts different models generate, how the models react to the new information that has become available and, not least, what assessments the management of the Monetary Policy Department made to arrive at the final forecast. At this meeting, the members of the Ex- ecutive Board also have the opportunity to ask the experts about details in the forecast” (p. 81).

The second half of the “second large monetary policy group meeting” held the next day is closed to all but the Executive Board, a small number of staff from the Monetary Policy Department, a few advisors, and representatives of the Communications Secretariat. As Hallsten and Tägtström put it:

“The reason for limiting participation in the second part of the meeting is to allow the members of the Executive Board to discuss the issues between themselves as thoroughly and as openly as possible. The members of the Ex- ecutive Board may now discuss and express opinions on the main scenario on the basis of their own assessments” (p. 82).

“…The various Board members present their views on the forecast. A member may, for example, express concern that the forecast for productivity is too high. If an alternative scenario for productivity has been drawn up the main scenario can be adjusted directly at the meeting by weighting the two scenarios for the growth of productivity together. The Board can then immediately see what impact this has on the forecasts for the repo rate path, inflation and, for example, the growth of GDP. Various repo rate paths that reflect different balances between inflation and the development of the real economy are also presented” (p. 82).

“On the basis of this material, the Executive Board attempts to arrive at a repo rate path that it seems likely that the majority of the Board members can support. At this point the Board members decide that they want to see additional alternative scenarios, or another repo rate path than the one that has served as the main scenario until this time. If so, these are produced by the next day when a follow-up meeting is held with the Executive Board and some of the personnel of the Monetary Policy Department” (p. 82-3).

Working closely with the Executive Board, the Monetary Policy Department then prepares the draft Monetary Policy Report which, in the assessment of the Monetary Policy Department, will gain the support of the majority of the members of the Executive Board. The Report contains the main scenario and alternative forecasts for consideration at the Monetary Policy Meeting of the Executive Board at which the repo rate and other monetary policy decisions are taken by majority vote.

The Monetary Policy Meeting begins with a brief update on how financial markets have developed, including market expectations of monetary policy

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5.3 Evolution of Monetary Policy in Sweden 2010- 2015: The Narrative in Real Time

We tell the story of how monetary policy in Sweden evolved from 2010 to late 2015 as it was experienced by the Executive Board and the Monetary Policy Department of the Riksbank in real time. The sources for this are the Monetary Policy Reports (or Updates) prepared for each Executive Board Monetary Policy Meeting and the record of each policy meeting transcribed in “Minutes of the Executive Board's Monetary Policy Meetings”. The Reports (prepared for the February, June/July, and October meetings) usually contain between 50 and 70 pages and include the main forecast scenario corresponding to the Board's policy decision, as well as alternative scenarios and occasionally special articles relevant for policy. Updates (prepared for the April, September, and December meetings) usually contain less than 20 pages and present only the main forecast scenario corresponding to the policy decision. Reports and Updates both include tables at the back with annual average forecasts of variables in the main scenario for the three-year forecast horizon. The documents

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also describe new information received since the previous Executive Board Monetary Policy Meeting.

There were 35 Executive Board Monetary Policy Meetings during the period from February 2010 to October 2015, 6 each year and 5 in 2015 at the time of writing. In other words, our narrative is based on some 1200 or so pages of Reports and Updates, and 800 or so pages of Minutes--around 2000 or so pages of real-time data, forecasts, analysis, discussion, and monetary policy decision-making (see also Table 2 and Annex 2).

Our narrative is necessarily highly selective, and we discuss only those elements of the history needed to evaluate how well monetary policy was carried out “meeting by meeting” taking into account the information available at the time. We take note of significant forecast revisions (conditioned on current policy actions in the main scenario) compared to the previous meeting's forecasts. We explain the policy action(s) taken. And we report the essence of the Executive Board's justification for its policy action. That justification comes primarily from the Monetary Policy Reports and Updates, which largely reflect the views of the majority of the Executive Board in favour of the current policy decision.

As emphasized in Section 5.2 above, Executive Board Monetary Policy Meetings provide a way for members to explain their individual perspectives on the policy decision and the Minutes provide individual members with a format as transparent and nearly as immediate as the Report or Update to explain their views. Dissenters have an especially strong incentive to express their views at the Monetary Policy Meetings for publication in the Minutes, since the majority point of view is already well represented in the Report or Update, and alternative scenarios and forecasts may not adequately capture concerns of dissenters and are not included in Updates at all. Often the most interesting commentary in the Minutes involves statements by dissenters that challenge the majority assessment and policy decision or question directly members of the majority about their individual policy positions. Dissenter commentary in the Minutes may seem excessive, repetitive, or strident at times. But, as emphasized in Section 5.2, the Riksbank asks Executive Board members to take individual responsibility for monetary-policy making, and provides members and especially dissenters with opportunity to do so at the Executive Board Meetings and through published Minutes with attribution. It is particularly important for our evaluation of monetary policy to report dissenting views at length in order to ascertain the extent to which monetary policy could have been improved had dissenting recommendations been adopted at the time.

We have characterised monetary policy during the Review period in six phases (see also Figure 9):

1.Recovery and tightening, February 2010-July 2011.

2.Pause for thought, September 2011-October 2011.

3.Disappointment and easing, December 2011-December 2012.

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Phase 1: Recovery and tightening, February 2010 – July 2011

The beginning of 2010 saw an important change on monetary policy in Sweden, with the first steps to tighten policy after the extraordinarily monetary stimulus following the global financial crisis. Since July 2009 the Executive Board had left the repo rate at its 0.25% post-crisis low, and left unchanged its published expected future path of the repo rate which implied a lift-off in the second half of 2010, reaching a 2.5% repo rate in early 2012 and around 4% in early 2013. In the main scenario at its February 2010 Monetary Policy Meeting the forecast for unemployment in 2010 was revised down substantially from 10.1% to 9.4% compared to the forecast at the December 2009 meeting. It was expected to be around 9% in 2012, the last year of the threeyear forecast horizon. The forecast for CPIF inflation in 2010 was revised up from 1.2% to 1.9%, after running at 1.9% in 2009, and was forecast to be 1.8% in 2012.

The Executive Board voted in February 2010 for the first time since the September 2008 crisis to tighten monetary policy somewhat (see Table 2). The Board decided to keep the repo rate at 0.25% but to publish a future repo rate path with lift-off beginning in summer or early autumn of 2010.

The Executive Board justified the slight tightening of monetary policy saying:

“…the repo rate may need to be raised somewhat sooner than was assessed in December … This is due to new information taking the form of a slightly higher international growth rate, stronger employment and higher inflation, among other developments, but also due to the improved functioning of the financial markets” (Monetary Policy Report (MPR), pp. 20-21). Market expected repo rates conformed closely to the Riksbank repo rate path to mid- 2011, then rose more slowly to only 3% in early 2013 (MPR, p. 31).

Mr Svensson entered a reservation against the majority decision and advocated instead cutting the repo rate to 0% and the repo rate path by 0.25% below that in the main scenario until the end of the fourth quarter of 2010. In so doing, Mr Svensson extended his consecutive series of dissents for easier policy begun in April 2009. He had argued for cutting the repo rate by 0.75% instead of 0.50% in April 2009, and in July 2009 he wanted to cut the repo rate to 0% instead of 0.25%. Mr Svensson reasoned much as he had in previous meetings. Comparing the forecasts for inflation and resource utilization with the corresponding repo rate paths outlined at the end of Chapter 2 of the February 2010 MPR, he pointed out that “[i]t is clear from these figures that the lower repo rate path provides a much better outcome for both inflation and resource utilization” (Minutes, p. 9). As the majority moved to tighten policy

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somewhat, Svensson complained that “[o]ne might think that if one nevertheless does not choose the low repo rate path one must have very strong reasons for this…Unfortunately, it is not made clear in the draft Monetary Policy Re- port why it is right to prioritize something other than the inflation target and resource utilization in the current situation” (Minutes, pp. 9-10).

Mr Svensson proceeded to criticise the draft MPR for stating “Whether or not the repo rate levels set in these scenarios would lead to a better or worse development of the economy than that portrayed in the main scenario is not a simple question to answer”. According to Mr Svensson, “What it should say instead is: ‘Whether or not the repo rate levels set in these scenarios would lead to a better or worse development of the economy than that portrayed in the main scenario is a very simple question to answer. The lower repo rate path provides a better development, while the higher provides a worse’” (Minutes, p. 10).

Responding to the reasons given for such uncertainty in the MPR Mr Svensson argues in the following paragraphs in the Minutes that i) all measures of resource utilization give the same answer, ii) he doesn't know of any information pointing to economic agents acting differently or paradoxically when interest rates are low, iii) there are still no signs that low interest rates have entailed any problems with regard to financial stability or the functioning of financial markets, and iv) according to evidence in the Riksbank's recent Fi- nancial Stability Report and Finansinspektionen, the ”unequivocal and certain conclusion based on very detailed data, studies and stress tests is that the housing market and credit granting do not at present entail any problem for financial stability” (Minutes, p. 11).

Concluding that the draft MPR gives no good reasons for not choosing the lower repo rate path, Mr Svensson asks “Is there some unspoken motive? However, unspoken motives have no place in transparent monetary policy. Anything that cannot be expressed openly cannot be a good reason” (Minutes, p. 11).

Ms Ekholm criticized Mr Svensson's reasoning regarding the comparison between different repo rate paths in the MPR saying that “she considered the reasoning in the Report that there may be consequences of different interest rate paths that are not captured in the analysis to be good. Different Executive Board members may have different opinions regarding the probability of these consequences and the significance they have for the outcome, but ultimately it is a question of different assessments” (Minutes, p. 15).

Later, Ms Ekholm added that “the factors which the other Executive Board members believe affect the expected outcome in different alternative actions should be incorporated into the actual forecast…At the same time, the Executive Board must make decisions on monetary policy now, and then the members must be free to weigh in the factors they believe have relevance for the future developments, even if these cannot be explicitly considered in the forecast” (Minutes, p. 18).

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alternative path for repo rates at the meeting, since they were not contained in the Monetary Policy Update. He also argued for presenting alternative repo rate paths and accompanying scenarios in the Updates as well as in the Re- ports.

Ms Ekholm drew attention to the fact that the market's expected repo rate path was now below the Riksbank's repo rate path saying “there is a discrepancy between market pricing and the Riksbank's repo rate path,” with the former implying a more expansionary monetary policy than the forecast. “Ms Ekholm claimed that this could lead to an actual monetary policy that was clearly more expansionary and thus less well-balanced than that proposed in the draft Monetary Policy Update” (Minutes, p. 11).

“…Mr Svensson considered that Ms Ekholm's comments on the difference between market expectations and the repo rate path, where market expectations further ahead were much lower than the Riksbank's repo rate path, were interesting. This means that the market is expecting much more expansionary monetary policy than the Riksbank has announced. Mr Svensson felt that this difference should be processed and discussed properly prior to the next monetary policy meeting… But on this occasion he would not be surprised if a slower rise in the repo rate would prove to be more reasonable” (Minutes, p. 18).

Earlier in the meeting, Mr Svensson had acknowledged the problem for making and interpreting forecasts of inflation and the economy when the published repo rate path appeared to lack credibility because it diverged from market implicit forward rates. Ms Ekholm supported Mr Svensson's call “for a thorough analysis of what the outcome would be for different decisions, given the way that interest rate expectations are affected. She agreed that such an analysis would be very useful. However, the Executive Board must make a decision on the repo rate now, based on the material that is available now” (Minutes, p. 17).

GDP grew at a surprisingly strong 6% annualised rate in the first quarter of 2010, and at the June 2010 Monetary Policy Meeting Swedish GDP was expected to grow by 4% over 2010 as a whole, 1.5% more than forecast in the Monetary Policy Update in April. One reason was the strength of exports, now forecast to grow in 2010 by 7.2% up from 4% in April, stimulated by the recovery abroad. Unemployment was forecast to fall from 9% in 2010 to 8.1% in 2012. CPIF inflation was running at 2% in 2010, but continued underutilization of resources was expected to push CPIF inflation down to 1.6% by 2012.

The Executive Board decided to raise the repo rate for the first time since the September 2008 crisis by 0.25% to 0.5% and to steepen the near-term published repo rate path somewhat while normalizing the repo rate at 3.8% rather than 4%. Market expected repo rates now conformed to the Riksbank repo rate path only to early 2011 and then rose to about 2.25% in mid-2013.

The Board justified its policy tightening saying:

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the example did not answer the question of how monetary policy would affect the likelihood of imbalances building up in the first place (Minutes, p. 16). Mr Svensson argued that monetary policy could counteract the effect on inflation and unemployment of the imagined 20% fall in housing prices by promising to hold the repo rate near zero for a sufficiently long period of time (Minutes, p. 22). Ms Ekholm countered by asking whether it would be credible for the Riksbank to hold such a policy rate for several years (Minutes, p. 24).

The growth of Swedish GDP, and especially exports, again surprised on the upside at the September 2010 Monetary Policy Meeting. Exports were now expected to grow in 2010 by 11.4% compared with 7.2% at the June meeting, stimulated by strength in the euro area, where GDP growth had been revised up for 2010 from 0.8% to 1.5%, despite the first signs of trouble in Greece and elsewhere. And expected Swedish unemployment for 2010 was revised down to 8.5% in September from 8.9% in June, and from 8.2% to 7.6% in 2012, respectively. The 2010 CPIF inflation forecast was unchanged at 2%, with inflation expected to be 1.7% in 2012.

The Executive Board voted to raise the repo rate from 0.5% to 0.75% and to leave the repo rate path decided at the June meeting unchanged.

The Executive Board justified its policy action saying:

“When resource utilization increases, the repo rate will gradually be increased to more normal levels. Another factor is that household indebtedness has increased in recent years” (MPU, p. 6).

Ms Ekholm dissented against the repo rate path in the majority decision, preferring a flatter path starting from 0.75% ending at 2.8% at the end of the three-year forecast horizon. She was concerned that weaker development abroad could be expected to reduce growth and inflation in Sweden too in the period ahead.

Mr Svensson dissented, preferring a repo rate of 0.50% and a low repo rate path that would rise gradually to only 1.75% by the end of the forecast period. He was concerned that the higher repo rate path in the main scenario would, if it became credible and was incorporated in market expectations, imply a considerable tightening of current actual monetary policy with a substantial increase in market interest rates of longer maturity and a substantial appreciation of the krona, which would lower the already low CPIF inflation and increase the already high unemployment during the forecast period.

Mr Per Jansson, head of the Monetary Policy Department, began the September policy meeting emphasizing that “monetary policy expectations expressed in the forward rates have also shifted down during the summer. Such shifts can be difficult to interpret. Historically the actual repo rate has often developed differently than expected by the market participants (according to forward rates)” (Minutes, p. 3). Specifically, market expectations now followed the Riksbank's repo rate path reasonably well until the end of 2010 but terminated at 1.75% at the end of the three-year forecast horizon compared to the Riksbank's 3.8% end point.

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end of the three-year forecast horizon. CPIF inflation was forecast to average 2% in 2010, and to fall to 1.3% in 2011 due to the appreciation of the krona, before rising to 1.9% in 2013.

The Executive Board decided to raise the repo rate by 0.25% to 1%, but it cut the published repo rate forecast from 2.4% to 2.0% in 2011 and from 3.8% to 3.4% at the end of the three-year forecast horizon. Market expected repo rates conformed to the Riksbank repo rate path to early 2011, but then rose less steeply to about 2.25% at the end of 2013 (MPR, p. 10 and Minutes, p.2).

The Board justified its policy action saying:

“GDP is now growing quickly and resource utilization is rising. Moreover, households' debts have increased substantially in recent years. If the increase in debts in relation to incomes continues over a long period of time, there is risk of imbalances building up in the Swedish economy” (MPR, p. 18).

This time, Ms Ekholm and Mr Svensson entered identical reservations against the decision, preferring instead to hold the repo rate at 0.75% and then gradually to increase it to 2.7% at the end of the three-year forecast horizon. If the Riksbank's repo rate path were to gain full credibility in the market, “[t]hey considered that the repo rate path of the main scenario entail[ed] a tighter monetary policy than presented in the MPR. It would lead to a further strengthening of the krona than in the report forecast and considerably higher long-term interest rates than at present. This would reduce inflation and raise unemployment. The expectation that the main scenario's interest rate path will lead to greater strengthening of the krona than in the forecast is based on the view that foreign policy rates will rise more slowly and that the exchange rate is affected by current low foreign long-term market rates” (Minutes, p. 33).

In the discussion Ms Ekholm “was sceptical towards the forecast for foreign policy rates as expressed in the draft MPR, even though it implie[d] a downward revision from the equivalent path in the September MPR” (Minutes, p. 2). The assumed path for foreign rates followed implied forward rates for four quarters but then rose steeply to around 2.75% by the end of 2013. Ms Ekholm pointed out that communications from the US central bank (Federal Reserve), the European Central Bank (ECB), and the Bank of England, indicated that, given their own forecasts, they saw a need to hold their policy rates unchanged longer than is implied by the Riksbank forecast. She “considered that the blue curve in Figure B11 in the draft MPR forms a more reasonable forecast for monetary policy outside Sweden” (Minutes, p. 4). The blue curve referred to was the Riksbank's measure of implied forward rates abroad which rose gradually to only 1.75% at the end of 2013 (MPR, p. 52).

Later, as part of an unusually long six pages of comments critical of the main scenario in the Minutes (pp. 15-21), Mr Svensson argued that the main scenario contained two problems. First, he argued that the Riksbank's repo rate path used in the main scenario was still much higher than market expectations. He worried that if it were to become credible, the policy stance would raise long-term interest rates in Sweden, strengthen the krona, stifle the recovery of exports and GDP, reduce inflation, and increase unemployment. Second, he

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implied a commensurate improvement in inflation relative to the 2% target and a faster reduction of unemployment towards its sustainable level.

In spite of the narrowing of difference among Board members evident above, there was nevertheless the usual extensive discussion in the monetary policy meeting. The following comments serve to capture the mood:

Mr Öberg observed that “[w]ith regard to the repo-rate path, however, his assessment still was that it will be necessary to increase the repo rate by 0.25 per cent at each of the year's six meetings. Öberg reminded the meeting that the repo rate is still very low. The market's repo rate expectations have shifted upwards and he noted that an increasing number of bank economists share the assessment that the Riksbank will need to increase the repo rate to 2.75 per cent by the turn of the year” (Minutes, p. 7). Mr Öberg was referring to the fact reported in Figure 3.4 of the MPR showing that since December, market expectations of future repo rates had largely converged on the Riksbank's published repo rate path.

During the meeting, Board members took some time to discuss and compare the reliability of alternative measures of resource utilization. Mr Svensson concluded that his “own preliminary assessment of the sustainable rate of unemployment is at 5.5 per cent after having read some papers on the subject and discussed it with several labour economists” (Minutes, p. 10). Later, he argued that the Riksbank's Ramses model might overstate the forecast of inflation at the end of the forecast period because it is “calculated using a standard assumption of a sustainable unemployment rate of 6.5 per cent, which he believes is too high” (Minutes, p. 12). Ms Ekholm noted that “[o]ne complicating factor in this recession is that reforms were implemented at the same time, which could be expected to lower what can be considered a sustainable rate of unemployment” (Minutes, p. 16).

Returning to familiar themes, Mr Nyberg pointed out that “[t]he forward rate curve has shifted upwards, and is now quite close to the Riksbank's reporate path, at least for the next 12 months or so. This seems to have taken place without any major inhibitory effect on the Swedish economy, via a rapid appreciation of the Swedish krona. This shift seems to reflect the international rise in forward rates” (Minutes, p. 15).

Mr Svensson (and Ms Ekholm separately) acknowledged during the meeting that “[t]his time there [were] no significant differences between … implied forward rates and the main scenario's assumptions about foreign policy rates in the first two years” (Minutes, p. 4).

At the April 2011 Monetary Policy Meeting, the recovery in the global economy was judged to be continuing at a good pace, the 4.3% forecast for 2011 global GDP was little changed from February despite a natural disaster in Japan, political unease in North Africa and the Middle East, and public finance problems in the euro area. Rising energy prices, in particular, pushed the 2011 forecast for global inflation slightly above 2%. In the main scenario Swedish GDP was forecast to grow by 4.6% in 2011 before falling back toward its 2.5% trend as the unemployment rate fell. The 2011 CPIF inflation

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Governor Ingves concluded his own view of the current situation saying: “Sweden currently has an expanding economy and we need to focus on balanced growth now that the recession is behind us. One risk with not raising the repo rate now, when the interest rate level is low in comparison to other economic upswings, is that the interest rate would have to be substantially increased later on. The current strategy of gradual increases is a safer choice, particularly when the starting position of these increases is far from the interest rate level to be expected under reasonably normal conditions” (Minutes, p.

16).

By the July 2011 Monetary Policy Meeting, the Swedish economy had continued to develop much as forecast in April. In the main scenario, GDP growth was forecast to slow from 4.4% in 2011 to 2.5% in 2013; the unemployment rate was forecast to fall from 7.4% in 2011 to 6.4% in 2013; and CPIF inflation was forecast to rise from 1.6% in 2011 to 2.1% in 2013. The Riksbank's forecast of policy rates abroad was revised down marginally from April. Despite intensified euro area concerns, evidence of a deceleration of the high rate of growth in emerging markets, and evidence that the expansion in the United States could be slower than expected, global GDP growth overall was forecast in the main scenario to be 4.2% in 2011.

The Executive Board voted again to follow through on its forecast and raise the repo rate from 1.75% to 2% and to leave unchanged the repo rate path from its April meeting so that the repo rate rose gradually to 3.8% by the third quarter of 2014.

In marked contrast to the last few policy meetings, expectations of future interest rates had shifted downwards by almost 50 basis points over horizons of one or two years since the previous policy meeting, ending up at 2.5% in 2014 (Minutes, p. 2). This development was highly significant. Riksbank monetary policy began to lose market credibility again, as it had in the first half of 2010. The fall in Swedish repo expectations mirrored similar declines in policy rate expectations in the euro area, the US, and in the UK. Global markets apparently took a more pessimistic view of the deterioration in future economic prospects than the main scenario of the Riksbank (MPR, p. 37).

The Executive Board justified its policy action much as it did in April 2011. As they had done since October 2010, Ms Ekholm and Mr Svensson entered a common reservation against the majority decision. Again they accepted the

0.25% increase in the repo rate at the previous (April) monetary policy meeting; but they argued against raising the repo rate, now 1.75%, further to 2%, instead favouring a gradual rise to the same 3.8% endpoint of the forecast horizon favoured by the majority of the Executive Board. It is notable that both dissenters accepted only a slightly lower current repo rate than the majority, and focused their difference of view on likely future rates.

During the discussion in the meeting, Ms Ekholm and Mr Svensson complained that although the Riksbank's forecast for overseas policy rates had been revised downwards in the draft Monetary Policy Report compared to the forecast in April, it was still well above the policy rates that appeared to be

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Phase 2: Pause for Thought, September 2011-October 2011

Market concern over sovereign debt in the euro area and in the United States, and concerns regarding global growth, intensified in the months before the

September 2011 Monetary Policy Meeting. Elevated risk aversion pushed down long-term bond rates and stock markets fell sharply in Sweden and abroad. The most important markets for Swedish exports were expected to

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slow down significantly. Consequently, 2012 Swedish GDP growth was revised down in the main scenario from 2.2% to 1.7%; and the forecast for Swedish unemployment in 2012 was revised up from 6.7% to 7.2% and from 6.4% to 6.9% in 2013. CPIF inflation was expected to be about a half percentage point lower in coming years than forecast in July. And various confidence indicators in Sweden, such as the purchasing managers' index and the National Institute of Economic Research's Economic Tendency Barometer, had fallen sharply.

The Executive Board decided to stop raising the repo rate for the first time since June 2010, to hold the repo rate at 2%, and to revise the repo rate path so it only reached 3.6% in Q3 2014.

As in July, monetary policy expectations - measured in implied forward rates - fell again across the entire forecast period. They showed that there was now some expectation that the repo rate would be cut by a half percentage point or so during 2012 (MPU, p. 10). The credibility gap between the Riksbank's repo rate path and market expectations had widened to around 1 percentage point by the end of 2012.

As they had done since October 2010, Ms Ekholm and Mr Svensson entered a common reservation against the majority decision. They accepted the 0.25% increase in the repo rate at the previous (July) monetary policy meeting and agreed to keep the repo rate at 2%, but they advocated a more gradual increase in the repo rate path to only 3% by the end of the forecast horizon. This time both dissenters accepted the majority’s 2% current repo rate and again focused their differences entirely on likely future rates.

During the policy meeting, Executive Board members noted that since July the sentiment in the financial markets and the media had deteriorated drastically. They noted the sensational downgrading from one of the credit rating agencies of United States Treasury debt. They debated the likely depth and persistence of the deterioration of economic conditions for the US and the euro area and Sweden. Mr Nyberg called these developments a “black August” (Minutes, p. 19). In July, Mr Öberg had “believed that the repo rate could need to be raised at all three meetings in the autumn, especially if it turned out that the sovereign debt problems in the euro area could be handled without tangibly negative effects on the financial markets. But developments since then had caused [him] to change his mind…the risks of higher inflation that [he] saw at the previous monetary policy meeting had not materialised…forecasts for inflation have been revised down” (Minutes, p. 22).

Mr Svensson complained again that the widened spread between implied foreign rates and the Riksbank’s forecast distorted the outlook for inflation: “it is as though the analysis is based on five-year interest rates abroad being 100 basis points higher than they actually are” (Minutes, p. 8). He also pointed out that the market's expected future repo rate path in Sweden had fallen sharply since July and now showed repo rates to fall to 1.5% by the end of 2012 and to remain there. By the fall of 2014, the Riksbank's repo rate path now exceeded the market's expected repo rate path by 2 percentage points, indicating

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Phase 3: Disappointment and Easing, December 2011-December 2012

The most significant feature of the December 2011 Monetary Policy Meeting was the sharp downward revision of growth prospects. GDP growth in the euro area in 2012 was revised down from 0.7% to 0.2%. Consequently, in the main scenario the growth of Swedish exports in 2012 was now forecast to slow sharply from 3.9% to 1.9%; and 2012 GDP growth itself was revised down from 1.5% to 1.3%, with unemployment in 2012 now forecast to rise to 7.5% from 7.2%. Forecasts for CPIF inflation were revised down slightly to 1.4% for 2011, and 1.2% and 1.7% in 2012 and 2013, respectively, before rising to 2% in 2014.

The Executive Board decided to cut the repo rate to 1.75% and lowered the rising repo rate path by about 0.3 percentage points to end at 3.2% in Q4 2014. Implied forward rates indicated that the credibility gap continued to widen as markets now expected the repo rate to be cut in stages by just over 1% to summer 2012 (MPU, p. 9).

Ms Ekholm and Mr Svensson dissented jointly again. They preferred cutting the repo rate to 1.5% immediately, and a path that stayed at 1.25% from Q2 2012 through Q3 2013, and then rose to just below 3%. This was justified by their assessment that the Monetary Policy Update's forecasts of foreign policy rates and Swedish resource utilization were both too high.

Mr Svensson emphasized that the outlook for inflation and unemployment was much poorer now than at the meeting in October. Mr Öberg argued for the repo rate cut saying that “…inflationary pressures are low now and will remain low in the period ahead. Various measures of underlying inflation are clearly below 2 per cent according to the latest outcomes and according to the forecasts for next year in the draft Monetary Policy Update”. Mr Öberg pointed out that “[i]nflation expectations five years ahead are on the other hand stable at just over 2 per cent according to the Prospera survey in December, which indicates that there is confidence in the ability of the Riksbank to keep inflation close to the inflation target in the long run” (Minutes, p. 27).

At the February 2012 Monetary Policy Meeting, the forecast for 2012 GDP growth in the euro area was revised down again from 0.2% to -0.1% compared with December 2011. In the main scenario the growth of Swedish exports in 2012 was forecast to slow from 1.9% to 0.0%, and 2012 GDP growth was revised down sharply from 1.3% to 0.7%. Unemployment in 2012 was now forecast to rise to 7.7% from 7.5% and to fall to 7.0% by early 2015. Forecasts for CPIF inflation were revised down for 2012 slightly to 1.1%.

The Executive Board decided to cut the repo rate to 1.5%, to keep it there for one year, and then gradually raise it from mid-2013 to about 3% at the beginning of 2015.

Figure 3:13 in the Monetary Policy Report shows that market expected repo rates shifted up by about 50 basis points from December toward the Riksbank's repo rate path and were expected to fall only to 1% by mid-2012 and stay there

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CPIF inflation just above 2% in 2014. This might argue against the path, she said, if it is believed that it entails a risk of inflation expectations drifting away from the 2 per cent target. However, she thought this risk was very low.

At the April 2012 Monetary Policy Meeting the main scenario again downgraded its forecast for euro area GDP growth to -0.3% in 2012. After contracting more than expected in 2011, Swedish exports were expected to grow by only 0.5% in 2012. Other aspects of the main scenario were little changed from February to April.

The Executive Board decided to keep the repo rate at 1.5%, remain there for one year, and then increase it towards 3% at the end of the forecast period.

Again Ms Ekholm and Mr Svensson dissented separately. They both preferred lowering the repo rate to 1% and a lower path than in the Monetary Policy Update. But Ms Ekholm preferred a repo rate at 1% through Q3 2013 rising to 2.25% by 2015. Mr Svensson preferred a repo rate that stayed at 0.75% from Q3 2012 through Q3 2013, and then rose to 2% by 2015.

The policy meeting again assessed the seriousness of developments in the euro area and revisited issues addressed in previous meetings. Some new concerns and views were advanced. Mr Svensson took up what he called three issues of principle: i) how monetary policy should be conducted and assessed, ii) that the policy process consists of two distinct steps, and iii) one should not forget the longer-run perspective. Among other things he argued that the process followed by the Riksbank lacked clarity associated with i) the use of CPI and CPIF inflation, ii) the use of measures of utilization other than unemployment, and iii) the use of target attainment at the end of the forecast period rather than over the entire period.

Mr Jansson, who had joined the Executive Board in January 2012, commented later that “he did not really understand the point of taking up these issues at the monetary policy meeting. These are questions that can be discussed at length, but there is not enough time available at a meeting of this nature. Mr Jansson said that Mr Svensson makes it sound as though the Ex- ecutive Board has never discussed these issues before, which he considers to be totally misleading…As a general comment on Mr Svensson's contribution regarding issues of principle, Mr Jansson said that he considers it important not to confuse what is right and what is wrong with different people having different opinions on difficult matters that do not have self-evident answers” (Minutes, p. 27-8).

Ms Ekholm raised a new concern about the monetary policy process. Her argument began by repeating that she, like Mr Svensson, “found it difficult to see any reasons why the repo rate and the repo-rate path should be held unchanged, inflationary pressures are low at present and, as pointed out in the draft Monetary Policy Update, are expected to remain so for a large part of the forecast period. CPIF inflation is not expected to reach 2% until late 2013”, and she wondered whether “the model analysis of alternative repo-rate paths discussed at the monetary policy meetings is based on a monetary policy response that is unrealistically rapid. If this is the case…there is a risk of failing

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There is no theoretical or empirical support for the claim that a higher repo rate in Sweden under current conditions would have a significant impact on financial stability in Sweden and that this would be a reason for keeping inflation below the target and unemployment above a long-run sustainable rate” (Minutes, p. 16).

Nevertheless, reflecting the views of the majority of the Executive Board, Mr Jansson observed that:

“Household indebtedness, as in February and April, continues to be a factor on the margin that in his opinion weighs against making further cuts in the repo rate. He did not feel that the risk situation was now more serious than previously, but the high debt ratio of the households continues to make the Swedish economy more vulnerable and fragile than it would be if the level of indebtedness was lower. If household indebtedness began to increase significantly again for some reason, then those responsible for various policy areas in Sweden should discuss conceivable measures to limit risks in this area” (Minutes, p. 20).

The Swedish economy again showed surprising strength at the September 2012 Monetary Policy Meeting. GDP increased by nearly 6% at an annualized rate in the second quarter of 2012, fuelled by surprising strength in exports. Swedish GDP growth for 2012 was revised up since July from 0.6% to 1.5%; and exports were expected to grow 1.3% in 2012 instead of -0.3%. But such strength was not expected to last and inflation and unemployment forecasts in the main scenario were little changed from July. One surprise was the sharp appreciation of the exchange rate since July -- the krona rose as much as 5% both against the euro and in trade-weighted terms to its strongest level in over ten years. A second significant surprise was a fall from 3.1% to 1.9% in the forecast of unit labour cost inflation for 2012, due to the upward revision of productivity growth for 2012 from 0.4% to 1.5%. Developments in the euro area continued to deteriorate as expected.

The Executive Board decided to cut the repo rate to 1.25% and keep it there until mid-2013 before planning to raise it gradually to 3% at the end of the three-year forecast period. Swedish markets now expected the repo rate to be just over 1% at the end of 2012, much as in July.

The Executive Board justified the lower repo rate saying: “Developments in countries important to Sweden are currently expected to

be relatively weak. This means that GDP growth in Sweden will also be relatively weak in the coming year. It is therefore hardly likely that the very rapid growth during the first half of the year will push up inflation, particularly as the high GDP growth has gone hand in hand with an unexpectedly high productivity growth. This, together with a faster appreciation of the Swedish krona than expected, means that cost pressures and inflation will be lower than was assessed in July” (MPU, p. 7).

Mr Svensson entered reservations against the Monetary Policy Update, the decision about the repo rate, and the repo rate path. He advocated cutting the repo rate to 1%, and a repo rate path that stays at 0.75% from Q4 2012 through

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and economic activity in the coming year...[and] there is a risk that CPIF inflation would rise above 2 per cent in a few years' time. A lower repo rate could also further increase the risks linked to households' high indebtedness…[but a] lower repo-rate path means that household debts as a percentage of disposable income will not increase but remain at the current levels” (MPR, p. 19).

The market’s expected repo rate path changed little from September, with the repo rate going below 1% by early 2013 and staying there through 2015. On this basis, the lower published repo rate path appeared to have little actual effect on market expectations (MPR, p. 33).

Ms Ekholm dissented against the unchanged repo rate and the repo rate path, advocating instead a 1% repo rate and a repo rate path lowered further to 0.75% until the end of 2013, and then raised to 1.75%.

Mr Svensson dissented against the Monetary Policy Report, the unchanged repo rate, and the repo rate path, advocating a 0.75% repo rate, and a repo rate path lowered further to 0.5% from Q1 2013 to Q1 2014, and then raised to 1.5%. He thought the Report's forecasts of foreign policy rates further ahead and foreign growth were too high.

At the meeting, Board members debated the extent to which the euro area would work through its banking and other structural problems without significantly worsening its economic prospects. There was also much debate about the extent to which it was necessary, feasible, or desirable to take account of housing prices and household indebtedness in the monetary policy decision. According to Mr Jansson, the argument for doing so comes down to this:

“[He] found it hard to ignore the fact that so many countries had run into problems with excess indebtedness in one way or another, and that so many had previously been certain that this indebtedness would not be a problem. [He thought] this called for a precautionary principle to be applied” (Minutes, p. 31).

Mr Svensson argued that it was not necessary, feasible, or desirable for monetary policy to take household indebtedness into account at all. Ms Ekholm expressed some sympathy for doing so, but thought that under the circumstances it was more important according to model simulations to lower the repo rate path in order to bring inflation back to target faster and unemployment down to a sustainable rate more rapidly.

During the discussion Mr Jansson supported the majority decision saying that “[i]nflation being below the inflation target for a certain period of time is a ‘cost’ that can be accepted if it means that the risk of a really bad development of household debt can be reduced a little” (Minutes, p. 22).

Mr Jansson's comment is interesting for two reasons. First, it is implicitly an argument against choosing the repo rate path by looking solely at deviations of inflation and unemployment from target over a conventional forecast period of around two years, as Mr Svensson continually advocated. Second, both sides in the debate accept the veracity of the main scenario and alternative model forecast simulations presented in the Monetary Policy Report. Both

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assessment was that his lower repo rate path would not noticeably affect any risks associated with household indebtedness since monetary policy normally has very small short-run effects on household indebtedness and with low and stable inflation no long-run effects either.

A new element in the debate on the Board was a questioning of the inflation forecast in the main scenario. From 2010 onwards CPIF inflation forecasts had systematically overestimated CPIF inflation for 2012. The forecasts rose fairly quickly to 2 per cent while actual outcomes show a downward trend since 2010 from 2% to below 1%.

In light of this, Ms Ekholm asked

“whether it is worth missing bringing inflation up to around 2 per cent and bringing down unemployment to some form of sustainable long run level, to try to influence household debt with the repo rate. [She] did not think it was. She said that it entails considerable economic costs in exchange for something that is highly unlikely [to be] attained using the repo rate. All of the calculations made by the Riksbank so far imply that the repo rate has very little effect on households' indebtedness…At the same time, it has substantial effects on inflation and resource utilization”.

“…[I]t was in the years before the financial crisis that the growth rate in lending to households reached double figures. Then there really was a wind to lean against. Now, however, credit growth is below 5 per cent at an annual rate and has been so for most of this year. It appears that housing prices have been rather stable over the last two years. So why pursue such a leaning against the wind policy now?” (Minutes, p. 13).

Ms af Jochnick, who had joined the Executive Board in January 2012, thought that

“it was unfortunate that so much of the focus of today's discussion had been on household indebtedness. Now that Sweden is facing a serious downturn she believed that the international outlook and domestic demand were the most important issues to evaluate. It was important to keep the discussion focused on how different scenarios would affect the development of the economy and on what monetary policy alternatives are available … to attain credibility it is important that monetary policy is seen in the perspective of a focus on the inflation target” (Minutes, p. 23).

Phase 4: Another Pause for Thought, February 2013-October 2013

At the February 2013 Monetary Policy Meeting economic developments in Sweden and abroad were largely in line with the December 2012 assessment and the main scenario forecasts remained more or less unchanged. Swedish GDP contracted in Q4 2012, unemployment was still expected to exceed 8% in 2013, and a second consecutive year of 1% CPIF inflation was forecast for 2013.

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Governor Ingves had earlier expressed concern about just the opposite risk, worrying that “[k]eeping the repo rate very low in this situation could contribute to inflation overshooting the target. There is a risk that the inflation target will lose its role as anchor. Nor can one disregard the significance of risk linked to low interest rates for over-indebtedness in various sectors” (Minutes, p. 26).

Forecasted 2013 GDP growth in the euro area was marked down slightly again to -0.4% at the April 2013 Monetary Policy Meeting compared with February. And forecasts in the main scenario were largely in line with those from February with two notable exceptions. First, after having levelled off in 2011, household debt as a percentage of disposable income was now forecast to grow from the current 174% to just over 177% at the beginning of 2016, revised upward from little expected growth in February (MPU, p. 5 and p. 20). Second, the CPIF inflation forecast for 2014 was revised down sharply from 1.8% to 1.4%; nevertheless, CPIF inflation in the main scenario was still forecast to average 2% in 2015 and CPIF inflation was still forecast at 1% for 2013.

The Monetary Policy Update explained the lower inflation forecast for 2014 as follows:

“Inflation in 2012 was lower than expected by the Riksbank and other forecasters. The Riksbank's interpretation of this, as presented in the report Ac- count of Monetary Policy 2012, is that it was mainly due to the international economic activity weakening to an extent that surprised both the Riksbank and other analysts. The unusually weak international economic activity probably had a direct effect on inflation, but may also have had an indirect effect. There are signs that companies raised their prices less than normal in relation to costs and demand. Over the past two years, unit labour costs have increased by around 2 per cent per year, at the same time as CPIF inflation has been around 1 per cent. This supports the assessment that companies now have more limited opportunities to pass on their higher costs to consumer prices”.

“Given this, the Riksbank now assess that prices will also be raised slightly more slowly in the coming years, in relation to costs. Other factors pointing to lower inflation are the forecast for the exchange rate, which is now stronger for the entire forecast period than it was in February. All in all, the forecast for inflation in 2014 has been revised down, despite domestic cost pressures remaining roughly unchanged since the assessment made in February” (MPU, pp. 7-8).

The Executive Board decided to keep the repo rate at 1%, and expected to begin increasing the repo rate in the second half of 2014, about one year later than in February, to 2.5% at the beginning of 2016.

The Executive Board justified the policy decision as follows:

“…Since December 2011, the Riksbank has halved the repo rate from 2 to 1 per cent and monetary policy is currently very expansionary. There are now signs of an improvement in economic activity, at the same time as housing

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against cutting the repo rate in the near term were not tenable,” as “[t]he starting point was already that inflation is expected to be below the target level for most of the forecast period, and unemployment is expected to be fairly high above what can be considered a long-run sustainable level”. She added that “[w]hen making a substantial downward revision to the forecast for inflationary pressures, it ought to be fairly self-evident that the repo rate needs to be cut…” and that “failing to cut the repo rate in this situation…could make external analysts more convinced that the Riksbank has abandoned the inflation target as the basis for its monetary policy decisions” (Minutes, p. 8). She argued that “given the emphasis put on the potential increase in risks connected with household debt if the repo rate were cut, one would expect a thorough analysis of what these risks are and how monetary policy affects them. But in her opinion there were only fairly loose claims that a lower repo rate would increase the risk of imbalances building up, and that such imbalances would be difficult to manage if there was an upward trend in housing prices and debt. There is no explanation of what the imbalances consist of nor how monetary policy is expected to influence them. There is merely a claim that they would be difficult to manage if there was an upward trend in housing prices and debt. An upward trend has been noted for a fairly long time since the mid-1990s, and this does not appear to have been particularly strongly linked to the repo rate” (Minutes, pp. 8-9).

Ms Ekholm pointed out that “Sweden has a poorly functioning housing market, where rent regulations, tax deductions on mortgage interest and regulations regarding land-use planning create major distortions. Housing construction has been extremely low for 20 years and this has led to a significant housing shortage in most growth regions. Moreover, the percentage of households that own their own home has increased rather substantially, probably as a result of the strong incentives to convert rental properties to tenant-owned properties in metropolitan regions...[T]his development is not something monetary policy can influence.…Monetary policy risks losing credibility, at the same time as household debt merely continues to increase” (Minutes, p. 10).

Mr Jansson explained the concern at the heart of the majority Executive Board decision:

“A new feature in the forecast presented now is that housing prices are picking up again. A reasonable increase in housing prices is, of course, not a problem but what may be a cause for concern is if there is once again a bal- ance-sheet-build-up in which housing prices and household indebtedness increase in a mutually reinforcing process. Such a process would be particularly dangerous if it encompasses unrealistic expectations on the part of the households about the future development of interest rates or housing prices. It is therefore important to prevent this from happening…It is clear that the Riksbank and monetary policy have a role to play in this context, but that other Swedish authorities and agents also need to take responsibility” (Minutes, p. 18).

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Mr Flodén, who joined the Executive Board in May, dissented against the decision to maintain the repo rate at 1% and against the path, advocating a 0.75% repo rate to be maintained until Q2 2014 after which it would follow the repo rate path in the policy decision.

The discussion and debate at the meeting followed largely along the lines of the previous meeting. There was one new notable concern.

Mr Flodén pointed out that there were signs that the credibility of the inflation target and monetary policy was beginning to be questioned. Mr Flodén observed that “[i]nflation expectations in the Prospera surveys and the surveys of the National Institute of Economic Research have fallen significantly in recent years, as shown in Figures 3:29 and 3:30 in the draft Monetary Policy Report”. He also noted that “in the Prospera survey of the inflation expectations of money-market players, the social partners and purchasing managers two years ahead, which was conducted in March this year, only 8 per cent of the over 200 respondents believed that the rate of inflation would be as high or higher than the level in the Riksbank's forecast. The average expectation was one percentage point below the Riksbank's forecast” (Minutes, p. 15).

At the September 2013 Monetary Policy Meeting euro area GDP growth in 2013 was revised up slightly to -0.4% compared to July. But Swedish export growth for 2013 was revised down from -0.8% to -2.2%, growth of private consumption in 2013 was revised down for 2013 from 2.5% to 2%, and Swedish GDP was expected to grow 1.2% in 2013, down from 1.5% in July. There was little change in inflation or unemployment projections relative to July.

The Executive Board decided to retain the monetary policy decision from April and July -- it kept the repo rate at 1% and published essentially the same repo rate path as in July, keeping the repo rate at 1% for about a year and then increasing the rate gradually to 2.8% at the end of the three-year forecast horizon.

The reasoning underlying the Executive Board's decision was much as in July except for the following paragraph welcoming the new framework presented by the Government for macro-prudential policy:

“The Riksbank has long called for a clearer framework and new tools to prevent and manage risks linked to financial imbalances, such as households' high indebtedness. The Riksbank therefore welcomes the Government's proposal, with new measures for a stricter framework to reinforce financial stability. Finansinspektionen will receive more tools, the foreign currency reserve will receive stronger funding, and a formal financial stability council will be established. This clarifies the allocation of responsibility and gives better conditions for taking further measures to reduce risks linked to households' high indebtedness” (MPU, p. 9).

Ms Ekholm again dissented against the decision to maintain the repo rate at 1% and against the repo rate path as she had done in April and July, advocating a 0.75% repo rate and a repo rate path at 0.75% through Q2 2014 rising now to 2.25% by mid-2016.

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debt ratio was not followed by a lowering of the repo rate…A natural interpretation of the failure to lower the repo rate when forecast revisions are made that justify a marginally lower repo rate is that household indebtedness is perceived as a problem that lays a kind of floor for the repo rate…” (Minutes, p. 5).

Mr Flodén observed: “How much scope there is to allow monetary policy to take other factors into account depends on the credibility of the inflation target and of monetary policy…He was concerned about what will happen to this credibility in the period ahead if inflation does not soon rise towards the target” (Minutes, p. 6).

Governor Ingves “reached the conclusion that until these [macro-pruden- tial] measures are in place and are deemed to have started to have an effect, the repo rate will have to be higher than it would otherwise” (Minutes, p. 23). He thought “the interest rate path was well balanced given the Swedish economic and inflation forecasts. As he noted earlier, redundancy notices are down at levels usually prevailing in good times. Even so, unemployment is high, which largely seems to be due to structural factors. Matching between jobseekers and vacant jobs has deteriorated recently. The labour force also consists to greater degree of groups that are further from the labour market than previously. Against this background, he drew the conclusion that this is largely a matter of structural problems on the labour market that monetary policy cannot fix” (Minutes, p. 24).

Phase 5: Going to Zero, December 2013-December 2014

In the main scenario, forecasts of real variables in Sweden and abroad were little modified at the December 2013 Monetary Policy Meeting compared with October. However, 2014 inflation in the euro area was revised down from 1.5% to 1.1%; and the ECB increasingly communicated its intention to sustain monetary ease, if needed, with unconventional measures. More important, the CPIF inflation forecast in Sweden was revised down again--from 0.9% to 0.8% for 2013, from 1.3% to 1% for 2014, and from 1.9% to 1.8% for 2015 before rising to 2% in 2016. In particular, in the months immediately ahead, CPIF inflation was expected to be just over 0.5 per cent, well below the previous assessment. Household debt as a percentage of disposable income was still forecast to rise 6 percentage points to 178 by 2016.

The Executive Board decided to cut the repo rate to 0.75% until the beginning of 2015 and then raise it gradually to 2.6% by the end of 2016. The aggressive easing action -- amounting to a 25 basis point parallel downward shift of the repo rate and entire future repo rate path -- strongly signalled the Riksbank's intention to address the low inflation problem.

The Executive Board justified its policy action saying:

“The monetary policy considerations have for some time concerned balancing how quickly inflation will approach the target with a lower interest rate against the increased risks linked to households' high indebtedness. Inflation

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has been low for a long time, and the unexpectedly low outcomes in recent months regarding in particular services prices imply that it may take longer for inflation to rise. Without a more expansionary monetary policy, there is a risk that inflation would not reach 2 per cent in the coming years” (MPU, p. 8).

Remarkably, the Executive Board decision was unanimous for the first time since February 2009. The unanimity was another strong signal of the Riksbank's intention to address the low inflation problem. Mr Jansson admitted that “this was probably the most difficult repo-rate decision he had been involved in during his time as a member of the Riksbank's Executive Board,” which he joined in January 2012. He observed that “[w]ith regard to economic prospects and the risks associated with household debt, little has happened since the most recent monetary policy meeting on 23 October. This suggests that one should hold onto the monetary policy plan from October and thus leave the repo rate unchanged at today's meeting” Mr Jansson went on to explain why he had come to favour decisive policy action against low inflation:

“But at the same time, inflation has been much lower than expected for two months in a row, compared with the forecast in October. Of course, individual outcomes should not overthrow a monetary policy plan spanning over several years. But in the present situation, where inflation has already been below target for around two years and is not expected to reach the target until autumn 2015, the level of tolerance for further negative inflation surprises is very limited…it is simply the case that there has been a shift in the form of a higher price tag on taking into account the risks linked to household debt” (Minutes, p. 7).

Mr Jansson continued explaining why he was particularly concerned about the surprisingly low inflation outturns:

“One circumstance that increases concern over the unexpectedly low inflation is that the main cause of the forecasting error is a weak development in prices of services. This is worrying for several reasons. Firstly, developments in prices of services should have a stronger link to the domestic economic situation than developments in prices of goods. An unexpectedly weak development in prices of services can thus indicate that companies are finding it even more difficult to pass on domestic cost increases to prices than the Riksbank is assuming. It should be noted in this context that the difficulties in passing on cost increases to prices were an important reason for revising down the inflation forecast as early as April this year. Secondly, with this, total inflation is more dependent on developments in prices of goods. However these have shown a tendency towards a weak trend over a longer period of time, which makes it less probable that they can compensate for a continuing weak development in prices of services…[A]ll this indicates there is a risk of the unexpectedly low inflation in recent months becoming entrenched and worryingly delaying the expected rise in inflation towards the target” (Minutes, p. 7).

Governor Ingves showed little enthusiasm for the policy proposal in his comments, concluding flatly that his “overall assessment led him to support

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the proposal to cut the repo rate to 0.75 per cent and the proposed repo-rate path” (Minutes, p. 15).

Forecasts in the main scenario were revised relatively little at the February 2014 Monetary Policy Meeting compared to December 2013. The Executive Board decided to keep the repo rate at 0.75% until the beginning of 2015 and then raise it gradually to 2.7% by early 2017, essentially the same monetary policy stance as December 2013. Market repo-rate expectations changed little from December 2013.

The Executive Board justified the policy action saying:

“New information received since December confirms the picture that inflationary pressures are low, even though economic activity is now strengthening. The low inflationary pressures justify continued expansionary monetary policy. At the same time, household debt as a share of income is expected to rise somewhat more in this forecast than was expected in December” (MPR, pp. 17-18).

For the second consecutive Monetary Policy Meeting the Executive Board decision was unanimous.

The discussion at the meeting covered many of the same issues as at earlier meetings and broke little new ground.

Economic prospects abroad were little changed in the main scenario at the

April 2014 Monetary Policy Meeting compared with February. Average GDP growth in Sweden over the forecast horizon was little changed. Productivity growth for 2014 was revised up from 1.2% to 1.9%; the growth of unit labour costs in 2014 was revised down from 1.8% to 1%. Most notably, CPIF inflation was lower than expected for the months of January and February at only a 0.4% annual rate, and CPIF inflation for 2014 was revised down from 0.9% to 0.7%. CPIF inflation was still forecast to rise to 2% by 2016, as the unemployment rate was to fall from 7.9% in 2014 down to 6.7% in 2016. Household debt as a percentage of disposable income was still forecast to rise, from around 174% to 180% by 2016.

The Executive Board decided to keep the repo rate unchanged at 0.75% for about one year and then raise it gradually to 2.7% by 2016.

The Executive Board justified its policy action saying that “[i]n light of the weaker inflation forecasts, the Executive Board adjusted down the repo rate path to reflect the greater probability of a repo-rate cut in the near term compared with the assessment in February” (MPU, p. 9).

Ms Ekholm dissented against the decision to maintain the repo rate and against the repo rate path, advocating cutting the repo rate to 0.5% for about one year and then raising it gradually to 2.2% by 2016. Ms Ekholm justified her dissent saying her preferred policy was associated with a higher forecast of CPIF inflation and a lower forecast of unemployment over the forecast horizon and a better-balanced monetary policy.

Mr Flodén also dissented against the repo rate and the repo rate path, preferring instead to cut the repo rate to 0.5% for about one year and then raise it towards the policy path in the main scenario. Mr Flodén justified his dissent

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importantly, CPIF inflation was revised down again -- for 2014 from 0.7% to 0.6% and for 2015 from 1.7% to 1.6%, but still expected to reach 2% in 2016.

The Executive Board decided to cut the repo rate by 0.5 percentage points to 0.25%, to keep it there until the end of 2015, and then raise it gradually to around 2.25% in mid-2017. Market repo rate expectations fell sharply this time and conformed reasonably well to the published Riksbank repo rate path through the end of 2016, but rose to only 1% by mid-2017.

The Executive Board justified the aggressive easing of monetary policy in the Monetary Policy Report saying:

“As inflation has been low for some time, and as it is important that inflation expectations should remain anchored around the target of 2 per cent, it is particularly important that inflation should begin to rise towards the target level…A lower repo rate also contributes to counteracting the effects of a stronger krona and lower import prices, which could result from lower international policy rates…[t]he expansionary monetary policy can contribute to inflation expectations remaining anchored around 2 per cent by sending a clear signal that monetary policy will ensure that inflation approaches the inflation target within a reasonably near future” (MPR, pp. 12-13).

Governor Ingves and Ms af Jochnick dissented against the decision to cut the repo rate by 50 basis points and against the repo rate path, advocating instead cutting the repo rate to only 0.5%, keeping it there until 2016, and slowly raising it thereafter.

This meeting was extraordinary not only because monetary policy was eased so aggressively and credibly according to market repo rate expectations, but also because the Executive Board broke so decisively with its reluctance to cut rates sharply in the face of low inflation, and also because the Board majority broke with the Governor to do it.

The two pivotal Board members at the meeting were Ms Skingsley and Mr Jansson. Ms Skingsley, who joined the Board in May 2013, led-off the meeting declaring that since April 2014

“inflation has continued to be lower than expected. The Riksbank's forecasts for the development of interest rates abroad have also been lowered. Furthermore, the internal analysis work conducted at the Riksbank has led to a significant lowering of the forecast for inflationary pressures. These three circumstances are the main reasons for the substantial cut in the repo rate and the repo-rate path proposed today”.

“Given the current forecast for CPIF inflation, in which the target of two per cent will be reached in early 2016, we will have undershot the target for roughly five years. [I]t should be remembered that there is no specific time requirement for how quickly inflation should be returned to the target…[A] long period without attaining the target can lead to movements in inflation expectations. As well-anchored inflation expectations are a central element in price and wage formation in the economy, it is therefore justifiable today to support an additional clear easing of monetary policy” (Minutes, p. 3).

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The Executive Board decided unanimously to keep the repo rate at 0.25% until the end of 2015 and raise it gradually to just above 2% by the end of the three-year forecast horizon. The decision essentially continued the policy stance from July.

The Executive Board's reasoning for the policy decision was largely as it had been in July. Importantly, however, the Board added a blunt warning to the Government and other authorities that

“[a] low repo rate makes it more urgent for other policy areas to manage the risks linked to household indebtedness and to developments on the housing market. The most important effect of the macro-prudential measures taken so far is considered to be that the resilience of the Swedish banking system will be strengthened, while the effect on household indebtedness is considered to be slight…measures need to be taken to influence household demand for credit. The responsibility for this type of measure lies with the Government and other authorities. Examples of measures that should be considered are a more stringent mortgage cap, amortisation requirements, a change in the right to tax deductions for interest expenditure and that sound minimum levels are introduced in the discretionary income calculations included in the banks' credit assessments. Moreover, it is important to introduce reforms, which will lead to the housing market functioning better. The Riksbank will, as before, monitor and analyse risks and resilience in the financial system and ascertain how these affect general economic development and thereby monetary policy” (MPU, p. 10).

Ms Ekholm began the meeting praising the change in the way inflation was forecast in the July Monetary Policy Report.

“In July, the Executive Board decided to attach more weight to models than to judgement-based assessments in the inflation forecast, as it has become apparent that the models provide relatively good forecasts according to forecast evaluations carried out at the Monetary Policy Department. This change may have eliminated the tendency towards systematic overestimations of future inflation that the forecasts have shown for a time…she viewed it as a positive development that the latest forecast errors have entailed an underestimation rather than yet another overestimation” (Minutes, p. 4).

Mr Jansson also commented on inflation developments since the early July policy meeting, pointing out that:

“The outcome for CPIF inflation in July was just over 0.6 per cent. This was almost 0.3 percentage points higher than expected. Inflation was somewhat above the forecast in the Monetary Policy Report already in June, but the outcome for July reinforced this tendency. One should of course not exaggerate the positive in such a short-term development. But after several months of systematic over-predictions of inflation it is naturally something of a relief…all else being equal, these positive inflation surprises mean that it has now become a little more likely that the forecast of a more lasting upturn will de facto happen” (Minutes, p. 8).

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rather substantial downward revision of the growth forecast for the euro area and the weaker economic outlook now applies to the German economy too” (Minutes, p. 14).

Mr Jansson continued:

“[I]t is no exaggeration to say that it has been unusually difficult to make reasonably accurate inflation forecasts recently. Since the outcome for October last year, which can be said to mark the beginning of this period with particularly substantial negative inflation surprises, eight out of twelve monthly outcomes have been below the Riksbank's forecast. The results are no better for other forecasters. For them too, on average eight out of twelve outcomes have been lower than expected. This is particularly disheartening given that we are talking about forecasts for the short run…[and] it is most probably that the trend with unexpectedly low inflationary pressures has not yet come to a halt” (Minutes, p. 14).

Toward the end of the meeting, Mr Jansson asked the question that must have been on the mind of other Board members:

“[T]he question here was why the major stimulus measures in recent years have not had greater effects on economic activity and inflation. Structural problems may of course be an explanation in some countries, but it is more difficult to understand why this has been the case in countries with a monetary policy transmission mechanism that works, a relatively robust financial sector, and stable public finances” (Minutes, p. 17).

Governor Ingves closed the meeting by reflecting on whether it was possible to fine tune monetary policy in a small open economy, particularly one as open as the Swedish economy, with large exports, imports and no limits on capital flows. He thought it probable that inflation would continue to deviate periodically from the target (Minutes, p. 18).

Assessments and forecasts in the main scenario changed relatively little at the December 2014 Monetary Policy Meeting compared with October. A sharp fall in oil prices pulled inflation down. But CPIF inflation in Sweden was still expected to rise from 0.5% in 2014, to 1% in 2015, and to 2% in 2016 as a result of the monetary policy easing that had been put in place.

The Executive Board decided unanimously to extend its 0% repo rate path from the first half to the second half of 2016 and then raise the repo rate only to 1.45% instead of 1.7% towards the end of 2017. The Board justified its policy decision much as at previous meetings emphasizing this time that ”inflation expectations in the longer run have fallen slightly further and are below the inflation target of 2 per cent” (MPU, p. 9).

Governor Ingves noted that “the fall in oil prices is contributing to a slight downward revision of the forecast for inflationary pressures. Inflation expectations in the longer term have also fallen somewhat. This suggests that monetary policy needs to become somewhat more expansionary…” and he went on to say that “[it] is now time to prepare potential non-conventional measures which, if the need arises, could be presented at the next monetary policy meet-

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Phase 6: Going Negative, February 2015-October 2015

Forecasts in the main scenario were relatively unchanged at the February 2015 Monetary Policy Meeting compared to December 2014 with the exception that another collapse in oil prices depressed inflation forecasts somewhat both abroad and in Sweden. The price of a barrel of oil had fallen from 115 dollars in June 2014 to around 60 dollars in February 2015.

The Executive Board decided unanimously to cut the repo rate to negative 10 basis points, to delay lift off until the second half of 2016, and to raise the repo rate only to 1.4% by early 2018. Market expected repo rates followed the Riksbank's negative repo rate path for 2015 and most of 2016 then turned up more slowly to only about 25 basis points.

The Board also announced that it would soon begin purchasing 10 billion SEK of government bonds. Mr Flodén dissented preferring to put the bond buying program on hold until it was really needed.

The Executive Board justified another easing of monetary policy as follows:

“The recent development of inflation has been roughly as expected, but there is a risk that lower oil prices will dampen inflation expectations, and thus inflation, more than is assumed in the forecast. To this can be added the increased uncertainty about developments abroad and on the financial markets. In order to support the upturn in underlying inflation so that CPIF inflation approaches 2 per cent and to ensure that long-term inflation expectations are compatible with the inflation target, a more expansionary monetary policy is needed… The measures that the Riksbank is now taking…underline the Riksbank's determination to safeguard the role of the inflation target as a nominal anchor for price setting and wage formation. In order to ensure that inflation rises toward the target, the Riksbank is prepared, should the need arise, to quickly make monetary policy more expansionary, even between meetings. This will entail further repo rate cuts, postponing the first repo-rate increase and increasing the purchases of government bonds” (MPR, p. 19).

In effect, the extraordinary package of monetary policy actions including bond purchases and especially the negative repo rate, and the promise to do more if needed outside of regular meetings, demonstrated that the Riksbank was fully focussed on the objective of getting inflation back up to 2% in a timely manner.

At the meeting, Mr Jansson noted that the outcome for CPIF inflation in December was 0.5%, the third month in a row that inflation rose faster than forecast. Nevertheless, he thought that a more expansionary monetary policy was needed because of a number of large risks that were difficult to quantify, but which if realized could significantly change the forecast for the worse. These involved i) Greece, ii) Russia and Ukraine, iii) the ECB's decision to make extensive purchases of financial assets, equivalent to almost three times Swedish GDP, and iv) the continued fall in long-term inflation expectations. The latest available survey data showed expectations of inflation five years

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At the end of February and the beginning of March, the foreign exchange markets fluctuated substantially and in the space of a few weeks there was a rapid appreciation of the krona mainly against the euro [linked to the ECB beginning its large scale asset purchases]. A continued rapid appreciation of the krona rate was expected to constitute a tangible risk to the inflation forecast that formed a base for the monetary policy decision in February (See the April MPR, pp. 6-7; Riksbank Press Release 18 March 2015, No. 6, p.1).

Forecasts in the main scenario for growth abroad and in Sweden were revised up slightly at the April 2015 Monetary Policy Meeting compared to February. Most importantly, CPIF inflation was revised up for 2015 from 0.9% to 1.1% and for 2016 from 2% to 2.3%; and CPIF inflation was forecast to be 2.2% in 2017.

The Executive Board unanimously decided to maintain the repo rate and repo rate path and to increase the repo rate to 0.8% by the second half of 2018. The Board decided to extend the purchases of government bonds with a further SEK 40-50 billion.

The April monetary policy decision was justified by adding:

“In an environment where monetary policy abroad is out of step, it is difficult to assess exchange rate developments. If the krona were to appreciate rapidly, there is a risk that it would stop the upturn in inflation” (April MPR, p. 7).

The discussion at the April meeting considered how much progress was being made against low inflation by the recent policy actions. Mr Flodén reminded the Board that “the Riksbank has long had a forecast in which it is assumed that the repo rate will be raised much faster than policy rates abroad at the end of the forecast period. In February, market forward pricing indicated that the repo rate would be around 0.2 percentage points lower than … policy rates abroad at the beginning of 2018 while the Riksbank's forecast entailed the repo rate being 0.7 percentage points higher than policy rates abroad at that time. Now that the repo-rate path has been revised down, almost the entire difference disappears. Both market forward pricing and the Riksbank's forecasts indicate that the repo rate will be marginally lower than policy rates abroad at the beginning of 2018. It now becomes clearer that monetary policy in Sweden must adapt to the expansionary monetary policy with low interest rates abroad, not just in the short run, but also in the longer term” (Minutes, p. 6).

Mr Flodén also expressed optimism about the effectiveness of monetary policy pointing out that:

“One indication that monetary policy is effective is that inflation has stopped falling and that various measures of underlying inflation have begun to rise. This is despite the continued downward pressure from abroad on inflation. A further indication that monetary policy is working is…that the reporate cuts [to negative] have had the expected impact on market rates. Above all, banks' lending rates have fallen roughly as they usually do when the repo rate is cut” (Minutes, pp. 6-7).

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“There is still considerable uncertainty, even though developments are heading in the right direction. Economic activity is strengthening in the euro area, but several countries are still being held back by high indebtedness and as-yet unresolved structural problems. The recovery could weaken again if confidence among households and companies were to fall for some reason. In this sensitive situation, the course of events in Greece constitutes a tangible risk. If the situation deteriorates, unease may spread to other countries in the monetary union. Since the monetary policy meeting in April, the foreign exchange and fixed-rate markets have been characterised by continued high volatility. For example, interest rates and exchange rates are being influenced by the ECB's ongoing asset purchases and by uncertainty over the timing and pace of the approaching interest rate increases in the United States. The Swedish krona has appreciated against several currencies and the trade-weighted exchange rate is therefore stronger than in the forecast from April. Uncertainty and the relatively large fluctuations on the foreign exchange market are making it difficult to assess how the exchange rate will continue to develop. If the exchange rate were to become too strong in relation to the Riksbank's forecast, this would mean slower increase in prices of imported goods and lower demand in the Swedish economy” (MPR, pp. 7-8).

Mr Ohlsson dissented against cutting the repo rate; he thought it sufficient to extend and prolong the purchases of government bonds in the current economic situation.

At the policy meeting members considered evidence of the effectiveness of monetary policy in raising inflation, the risks to the forecast in the main scenario, and the feasibility and desirability of the various policy options available to ease monetary policy further if need be.

Three key concerns, in particular, were discussed at the policy meeting as determining whether monetary policy would soon return inflation to 2% and preserve the credibility of the inflation target. These concerns are summarized below.

First, after having been reasonably well-anchored throughout the period of inflation targeting, and above 2% since 2010, expectations of inflation fiveyears ahead in the Prospera survey had fallen below 2% since mid-2013 (MPR, p. 31). Mr Jansson cited the two new surveys of inflation expectations since April. He noted that five-year expectations of both employer and employee organizations had increased, from 1.76 to 1.89 per cent and from 1.72 to 1.81 per cent, respectively. For all groups in the June quarterly survey, five-year expectations rose from 1.73 to 1.78 per cent. But five-year expectations of money market participants remained stable at 1.85 per cent (Minutes, p. 13).

Second, the Monetary Policy Report pointed to the depreciation of the krona since the start of 2014 as an important factor contributing to the recent upturn in inflation. According to the trade-weighted (KIX) nominal exchange rate, the krona depreciated by a little more than 10 per cent since the start of 2014 to early 2015 as the repo rate was cut from 1% in December 2013 to below zero. But since early 2015 the KIX had given back around 3 per cent

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Ms Skingsley, who had joined the Board in May 2013, began the meeting by pointing out that “the underlying inflation rate measured as the CPIF excluding energy ha[d] risen from about 0.5 per cent in the spring of 2014 to 1.5 per cent in the latest outcome from July” (Minutes, p. 3).

Mr Jansson supported maintaining the monetary policy stance decided in July with the fact that the inflation outlook had improved. In particular, he announced that “recent outcomes for longer-term inflation expectations confirm that the downward trend in confidence that the Riksbank will meet its inflation target has been broken. After having shown a low-frequency downward trend for several years, longer-term inflation expectations turned upwards or stabilised over the spring and summer. Expectations are still a few tenths of a percentage point below 2 per cent but the important point is that the downward trend has now been stopped” (Minutes, p. 9). He credited the Riksbank’s highly expansionary policy as having a beneficial effect on the krona saying “the krona exchange rate has weakened since last year, which has contributed towards higher prices for imported goods and services. This provides an important explanation for the recent rise in inflation…” And he also mentioned that “[i]n recent years, unit labour costs--which are usually a good indicator of underlying inflationary pressures--have increased more or less at a historically normal rate” (Minutes, p. 10).

However, Mr Jansson also acknowledged that there were good reasons for making monetary policy more expansionary than in July. These were linked to international developments and risks, associated with the collapse of oil and commodity prices, which could further push down both actual and expected inflation. In particular, he worried that “the Chinese economy [is] slowing down and successively being readjusted away from the commodity-heavy industrial sector. This is one explanation for the fall in value of currencies in many emerging market and developing economies that are dependent on commodity exports to China. This development may also be significant for the Federal Reserve and the ECB. It cannot be ruled out that the Federal Reserve will react by postponing its policy-rate increases slightly and that the ECB will communicate an intention to further increase its purchase of securities. As current interest rates and exchange rates are determined by expectations of the future, this could rapidly lead to tighter monetary conditions in the Swedish economy” (Minutes, pp. 10-11).

Toward the end of the meeting, Mr Flodén chose to respond as he put it to an increasing number of commentators suggesting that the Riksbank should be satisfied with the current development, i.e., low inflation and reasonably good growth, and either reduce the inflation target or be more tolerant of an inflation rate that is lower than the target for a prolonged period. With the lower inflation target, he continued, it is argued that the Riksbank could immediately raise the repo rate back into positive territory and hence ensure that households and pension fund managers receive sufficient return on their investments, instead of enticing them to make riskier investments by having negative interest rates.

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