World’s Oldest Central Bank Says New Crisis Tools Are Needed

The governor of Sweden’s central bank, the world’s oldest, said monetary policy can’t keep using old instruments to address new crises, and suggested that he and his peers will need to embrace more unconventional measures in the future.

“We need to stand ready to develop new tools and make new kinds of analysis -- so that we can reach our inflation target,” Governor Stefan Ingves said in a speech on Tuesday. “If the world changes, we need to change with it.”

The Riksbank, which was founded in 1668, is trying to figure out how best to calibrate policy to meet a world increasingly dominated by the financial sector. Ingves abandoned negative rates a year ago, and has since made clear he sees quantitative easing as a more effective tool to fight the current crisis.

“Globally and in Sweden, the financial markets have grown larger, both in terms of the volumes traded and in terms of the number of financial instruments,” Ingves said. Another “change is that the global level of interest rates has fallen. This is having a substantial effect on the scope for policy rate adjustments to stimulate the economy.”

Ingves said the Riksbank’s decision to focus on its balance sheet rather than interest rate cuts reflects long-term changes in the global financial system, and not just the current crisis. He also pointed to a world that’s become “more electronic” as a further aspect weighing on monetary policy, and cited the impact of digital currencies such as Bitcoin as an example.

Should economies return to a state closer to the one that existed before the financial crisis of 2008, the policy rate will probably “be in focus again,” the Riksbank governor said.

“It’s of course everyone’s hope that things at some point...will return to normal,” Ingves told reporters in Stockholm after his speech. “If that happens, there are good reasons to assume that in 10-15 years’ time, our balance sheet will slowly start to shrink again.”

Sweden’s central bank surprised markets last month with a bigger-than-expected expansion of its asset purchase program, to 700 billion kronor ($82 billion). The bank kept rates unchanged, as expected, but said there’s room to deliver more stimulus between scheduled meetings.

©2020 Bloomberg L.P.

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