Riksbank plans revamp of inflation targeting regime

Bloomberg

Sweden’s central bank wants to track a different consumer-price gauge and introduce a tolerance band in a move that will give policy makers more leeway to unwind stimulus after half a decade of below-target inflation.
The world’s oldest central bank wants to start targeting an index called CPIF, which factors out changes to mortgage costs, instead of the headline consumer price index it’s officially been using, it said from Stockholm on Tuesday. It also proposed introducing a “variation band” of 1 percentage point around the
2 percent target.
The bank downplayed the impact of the changes, since CPIF has been used as an operational target already. “The Riksbank will continue to strive towards 2 percent inflation, regardless of whether the outcome is within or beyond the variation band,” it said. “The variation band under consideration is therefore not a so-called target range.”
Swedish policy makers have re-examined their inflation targeting after unleashing a battery of stimulus — including negative interest rates — to jolt the economy out of a deflationary spiral. The proposal was widely anticipated and analysts predict the move will give the central bank more freedom.
Nordea Bank, Scandinavia’s biggest lender, said the changes will have no immediate impact, and reactions were also limited in the currency and bond markets.
“All in all, the changes announced today are a small step towards increased flexibility, but currently the challenges to stabilize inflation around the 2 percent target take the upper hand,” said Torbjorn Isaksson, chief analyst at Nordea, in a note. “Any reversal of monetary policy is still a long way off, despite today’s proposals.”
The bank signaled last year it may change its inflation gauge to adjust for mortgage costs and said re-introducing a tolerance interval would make it easier to communicate policy.
The Riksbank hasn’t met its target for more than half a decade and has also fallen short, on average, over the past 20 years.
The bank’s deliberations are now being referred for consultation. If the Riksbank decides on a new target variable and variation band, the initial application of these changes is
expected to be able to be
implemented at the
monetary policy meeting in September, it said.