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Monetary Policy – Oldest Central Bank Announces New Inflation Regime News

Monday, August 21st, 2017 | Economy

Swedbank and SEB, two of Sweden's largest banks, expect the new framework to be presented in the context of a speech by First Deputy Governor Kerstin af Jochnick, entitled "Monetary Policy and Inflation – the Importance of Clarity and Openness" , The Riksbank had signaled that such an announcement would probably be made before its September meeting.
The monetary policy makers have examined the feedback on a proposal presented in May, which would give them more room for maneuver in reaching the 2% inflation target. The central bank, which has been around for three and a half centuries, proposed to introduce a price index, which excludes mortgage costs (CPIF), and a "variation band" of 1 percentage point around the target.
According to the SEB, such a change is likely to strengthen the crown. The Swedish currency is already speculating on the fact that the central bank is at the end of a period with record-high stimuli. Inflation exceeded the 2 percent mark last month for the first time since 2011. The years of monetary easing, with interest rates well below 0, as well as bond purchases, had preceded.
"I would be very surprised if they did not introduce the variation band," said Robert Bergqvist, chief economist at the SEB, in the telephone interview with Bloomberg. "And the time is now even better, because the core inflation is over 2 percent and therefore they do not risk signaling that they give up the goal." Bergqvist expects the new regime will give the market "more flexibility against the Riksbank, and this will lead to a stronger crown."
The central bank had reduced the possible impact of a new inflation regime in May. She said that CPIF is already being used as an operational target and the objective of monetary policy is to stabilize inflation at 2 percent. The "variation band" is not a "target area", said the Riksbank, meaning that it will still aim at 2 percent inflation.
According to Knut Hallberg, senior analyst at Swedbank, this means that any market impact should be low. "The Riksbank has taken great pains to emphasize that this should not be interpreted as a form of monetary policy change but rather as a communicative tool," he told Bloomberg.


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