Harry Flam: Missing minutes of Riksbank monetary policy meeting

This is an English translation of an Ekonomistas post.

The current Riksbank monetary policy is inconsistent. This creates uncertainty, which in turn weakens the efficiency of monetary policy. The detailed minutes of the monetary policy meetings are an important part of the Riksbank’s communication policy. Oddly enough, such minutes are missing from the Riksbank’s latest monetary policy decision, creating additional uncertainty about monetary policy. It is important that monetary policy is clear and credible. This increases the Riksbank’s power to create consensus among economic decision makers about the economic outlook and thereby reduce uncertainty, which is good for the economy.

On February 11, the Riksbank decided to lower the repo rate to -0.1 percent and to buy 10 billion kronor of government bonds. Martin Flodén disagreed with the decision to buy bonds in the following words in the monetary policy minutes (p. 7):

Mr Flodén also believes that purchases of government bonds in the Swedish context have the greatest potential to influence interest rates and raise inflation expectations if the purchases are presented as part of a systematic monetary policy strategy. It will then be problematic to buy government bonds when market rates are already much lower than is indicated by the repo-rate path presented in the draft Monetary Policy Report. Another means of describing this is that the bonds are overvalued if one relies on the repo-rate path. Mr Flodén said he was afraid that the communication regarding what the Riksbank is trying to achieve with the bond purchases becomes unclear if the Riksbank does not at the same time have a repo-rate path that is lower than, or at least roughly compatible with, the bond prices prevailing on the market. Mr Flodén said that he found it strange to buy government bonds now without at the same time making a large downward revision to the repo-rate path.

The same point was made by Stefan Palmqvist in a blog post on Ekonomistas (English translation). He showed that there is a growing gap between the Riksbank’s and the market’s interest-rate trajectories starting in the second half of 2016. But despite the fact the Riksbank’s trajectory is above the market’s, the Riksbank wants to push down the longer interest rates further, which is contradictory and inconsistent.

It is odd that none of the five other members of the board commented on Flodéns reasoning in the minutes about the lack of clarity and inconsistency of monetary policy.

On March 18, the Riksbank made the decision to lower the repo rate further – to -0.25 percent – and to purchase more government bonds – now in the amount of 30 billion kronor. Monetary policy thereby became even more unclear and inconsistent. It would be interesting to know how the members of board motivated their latest monetary policy decision, if Martin Flodén disagreed with the others and if and what they answered him.

Unfortunately, we will not know what was said. The monetary policy decision was for the first time since the board was created in 1999 made at an ordinary board meeting, not a monetary policy meeting. No minutes of the discussion where one can follow the reasoning of the board members are written at ordinary meetings.

That the decision was not made at a monetary policy meeting according to established practice is strange in itself. At the two previous occasions when the Riksbank has made monetary policy decisions between regular meetings – as part of an internationally coordinated interest rate cut six days after September 11, 2001, and in connection with the bankruptcy of Lehman Brothers in the fall of 2008 – this has taken place at extraordinary monetary policy meetings with detailed monetary policy minutes. Not so this time. Why?