Swedish Central Banker Backs Idea of Higher Inflation Target

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Central bankers globally would benefit from raising their inflation targets to boost the power of both conventional and unorthodox monetary policy tools, according to a Swedish policy maker.

Higher inflation targets would make interest rates a more potent tool by providing additional policy room in difficult times and supporting employment, while also raising the effectiveness of central bank asset purchases, Riksbank Deputy Governor Per Jansson said in a speech in Stockholm. The view has become more entrenched since 2018, when he first argued in favor of it, he said.

“Despite massive efforts, both with policy rates and asset purchases, we have found it hard to keep inflation up,” Jansson told reporters after the speech.

“There are tendencies of long-term confidence in the targets also falling, in Sweden as well as elsewhere, and I believe that we have to try different roads to find a way out of that.”

As policy makers globally are seen maintaining their expansionary policies for years, a growing number of central banks, such as the European Central Bank, are reviewing their monetary policy frameworks. While the pandemic has pushed inflation lower, Jansson believes structural forces such as globalization and aging “may gradually start to go into reverse.”

International support for raising inflation targets is gradually increasing, also outside academia, Jansson said. The strategy announced by the U.S. Federal Reserve earlier this year of letting inflation temporarily overshoot the central bank’s target “risks leading to quite long periods of uncertainty,” while it would still be hampered by the historically low level of global real interest rates.

“A common view is that a higher inflation target is unrealistic and will never be achievable, as even inflation below the existing target seems to be considered by many to be a law of nature,” Jansson said. “But I find it difficult to see inflation and inflation expectations being completely unaffected by the expansionary policy that the world’s central banks are currently conducting and intend to conduct for a long time to come.”

©2020 Bloomberg L.P.

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