On Tuesday, the Swedish central bank, Riksbank, proposed to scrap the CPI as the formal target in favour of the CPIF. Moreover, the central bank also implied that the tolerance bank of plus or minus 1 percentage point around the 2 percent target should be introduced again. The tolerance band was abolished in 2010. The central bank stated that inflation outcomes outside the variation band “should not, in themselves, lead to monetary policy measures”. Therefore, it appears that the band is slightly less strict than the earlier band, noted Nordea Bank in a research report.
In the near term, the monetary policy’s consequences appear to be restricted. The tolerance band’s purpose is to underline the challenges in how the exactly the central bank can curtail inflation. The reintroduction of the variation band might be seen as slightly “hawkish” as it makes additional stimulus measures less likely. Meanwhile, inflation expectations might drop if it is seen as a larger acceptance for deviations from the target.
Overall, the changes announced are small step towards increased flexibility, but presently the challenges to steady inflation at about the target rate of 2 percent take upper hand. Therefore, any reversal of monetary policy is far away despite the announcements made, added Nordea Bank.
