STOCKHOLM (Reuters) - Sweden’s central bank on Tuesday proposed tweaking the way it targets inflation to set its sights on underlying rather than headline price rises and introduce a “variation band” around its 2 percent goal.
Riksbank policy has come under close scrutiny since the financial crisis, and while many central banks have struggled with low inflation, the Riksbank has undershot its target consistently since introducing it in 1995.
The Riksbank’s proposals will affect the formal policy framework, but it said they would not have a direct impact on its policy decisions.
“It does not change the (inflation) target because that is 2 percent and we will continue to strive to reach that all the time,” Governor Stefan Ingves said.
The Riksbank proposed two changes.
It said it was considering switching to a measure of underlying inflation for its target known as CPIF, a measure that already weighs heavily in its policy setting but which has not been a formal goal.
Secondly, it said reintroducing a variation band of 1 percentage point on either side of the target would illustrate that inflation cannot always be held exactly at 2 percent.
It removed a band in 2010 and some analysts have said bringing it back could allow the Riksbank to tighten policy earlier.
“If the market were to see this as the Riksbank being done with stimulus, then the crown could strengthen and the Riksbank wants to avoid that at all costs,” Nordea Chief Economist Annika Winsth said.
“That is why the Riksbank is stressing that the focus is still 2 percent.”
Revising the inflation target will bring some clarity to a policy that many have seen as confusing. The official target has been headline consumer prices, but the Riksbank has long said it looks more closely at CPIF and has even given prominence to CPIF excluding volatile energy prices.
Targeting CPIF, which strips out the effect of interest rate changes, will also stop the Riksbank perception the central bank is chasing its own tail.
But it will not solve the problem of inflation itself.
Wage rises -- a key element in inflation -- are likely to remain subdued while globalization and digitalization seem to be keeping price pressures low across much of the world.
Even extreme monetary policy, including negative rates and a chunky program of buying bonds, has yet to push price rises up sustainably to a rate of 2 percent.
The Riksbank said it would consult widely on the proposed changes which, if adopted, are expected to be implemented at the monetary policy meeting in September 2017.
Further changes could come when the government completes its review of Riksbank policy in 2019.
On Tuesday, Ingves made a call for the central bank to be given a wider role in heading off future financial crises.
“That would be all the instruments that are there today in terms of the loan-to-value ceiling, how much you can borrow in relation to your income or, for example, counter-cyclical capital buffers,” Ingves said.
The government gave the Financial Supervisory Authority the mandate to overseas financial stability in 2013, much to the Riksbank’s chagrin.
A subsequent review by former Bank of England Governor Mervyn King and U.S. academic Marvin Goodfriend recommended the Riksbank be given a greater role in macroprudential oversight.
Reporting by Daniel Dickson, Simon Johnson and Bjorn Rundstrom; Editing by Catherine Evans