The Riksbank throws in the towel: Svensson and the market monetarists were right
James in London sent me the following:
Sweden‘s central bank cut its main interest rate for the first time in a year and signaled it won’t tighten policy until the start of 2015 to combat deflation in the largest Nordic economy.
. . .
“Inflation has been unexpectedly low and, despite the recovery, inflationary pressures over the coming year are expected to be much lower than in the most recent forecast in October,” the bank said. “Slow increases in the repo rate are not expected to begin until the start of 2015.”
. . .
“The credibility of their inflation target has started to chip away at the edges so it would have been weird if they didn’t do anything about that,” said Mikael Grahn, an analyst at Danske Bank A/S in Stockholm. “The changed repo rate forecast feels more reality-based but there’s a risk they may have to delay the timing of their first rate increase even further.”
Investor Survey
A survey by SEB AB published last week showed a majority of investors and traders thought the bank’s perceived reluctance to cut was harming its inflation target. More than 25 percent also said the bank’s underlying inflation forecast wasn’t credible, while half urged the bank to introduce a tolerance band.
It must be a nice feeling for Lars Svensson to be able to say “I told you so” every time he runs into his former colleagues at the Riksbank. And there was never really any serious doubt that he was right and they were wrong.
This also made me smile:
Central bank easing will coincide with laxer fiscal policy. The government has said it will cut income taxes next year for a fifth time since coming to power in 2006. Prime Minister Fredrik Reinfeldt says the cuts are designed to boost domestic demand.
I know I shouldn’t say this because the Swedish government has done a good job on supply-side issues. I like many of their policies. Even the income tax cut may be wise. But to cut income taxes in order to boost aggregate demand at a time when the central bank is not at the zero bound is just beyond clueless. We truly live in a period of mass ignorance. Everything macroeconomists have learned over the past 100 years has gone right out the window. Policymakers are hopeless. Even in enlightened Sweden.
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17. December 2013 at 14:41
Here’s a better link for the news: http://www.bloomberg.com/news/2013-12-17/riksbank-cuts-benchmark-rate-as-disinflation-hurts-credibility.html
I wonder how long before the Bank of Canada does the same.
17. December 2013 at 17:38
I keep coming back to it…something is wrong, stubbornly and zealously wrong, in central bank culture. They appear insensate to the macroeconomic needs of economies, so devout and sustained are their oblations to nominal price stability…0.7 percent inflation now on the PCE index…the question is, have central banks become ossified or coprolitic?
17. December 2013 at 18:36
Svensson > Yellen and Fischer
17. December 2013 at 21:07
Market monetarists are hopeless.
17. December 2013 at 21:52
Where is the self-worth and integrity in the knowledge that one can convince counterfeiters that they can counterfeit more money than they thought?
17. December 2013 at 23:28
Geoff. Good to see you are as graceful in defeat as you are when winning. I still think one day you will ‘get it’. I just hope you will be more civil when on our side than your old side.
Or, maybe, it is better for us that you remain hostile, giving Austerians a bad name and MM’ers appear moderate and reasonable. Perhaps that is part of what is happening already as indicated by those Bloomberg reports casually assuming below 2% CPI, core CPI, PCE is a very bad place.
17. December 2013 at 23:46
“Geoff. Good to see you are as graceful in defeat as you are when winning. I still think one day you will ‘get it’. I just hope you will be more civil when on our side than your old side.”
Not sure how me being overpowered by gun toting maniacs employed by politicians guided by market monetarist thinking instead of flippertygibbet thinking, can qualify as a “defeat” to intellectuals, but then you’re not an intellectual. You’re a propagandist of control and coercion, whether you are aware of it or not.
“Or, maybe, it is better for us that you remain hostile, giving Austerians a bad name and MM’ers appear moderate and reasonable. Perhaps that is part of what is happening already as indicated by those Bloomberg reports casually assuming below 2% CPI, core CPI, PCE is a very bad place.”
Ya, I’m the hostile one telling you to stop advocating for guns to be pointed at innocent people, who only want to live their lives without being coerced. Oh the horror. Yup, you got me. I’m the social degenerate. I’m the person who hates his fellow humans.
You did not win the intellectual battle. You have already lost that ages ago. It is why you are now seeking state power to get what you want. Sorry, but it’s the truth. None of you understand how a free market works. You only know politics and some history.
18. December 2013 at 00:04
I hope you’re not assuming that Reinfeldt is cutting taxes to boost demand just because he says so…
18. December 2013 at 05:44
Scott,
I would notice that Sweden is probably one of the few countries in the world where conservative and libertarian thinkers have picked up on market monetarist ideas and the general idea of monetary easing/fiscal consolidation seems to be well-supported by the conservative coalition government.
The arguments the governments use for tax cuts might be to spur aggregate demand, but I am pretty sure that deep down Finance Minister Anders Borg is thinking about this as a supply side issue.
18. December 2013 at 06:00
Thanks Nick.
Saturos and Lars, Good point. But I judge people based on what they say. That’s my job as a pundit. Even if he didn’t mean it, he should be criticized for saying so. After all, the real target of this post is the people who agree with what he said, and there are plenty of them. They will read this post (some of them), he won’t.