MNI INSIGHT: BOE Work Backs Riksbank On Split Macro/Mon Policy

--New BOE Research Finds Monetary Policy Ineffectual For Stability Risks

--Paper Backs Ex-Riksbank Svensson View

By David Robinson

     LONDON (MNI) - Monetary policy is ineffectual in bolstering financial

stability and macro-prudential policies have little impact on the real economy,

upcoming Bank of England research will show, MNI understands.

     The as yet unpublished research, by Bank economist David Aikman and others,

was cited by BOE Deputy Governor Ben Broadbent in a speech on April 12 and will

help justify the approach of those central banks that refuse to let stability

concerns influence interest rate setting.

     Former Riksbank Deputy Governor and leading monetary policy theorist Lars

Svensson said in response to a question from MNI that the research supported his

view that monetary policy cannot help do the job of macro-prudential policy. 

     In his speech, Broadbent said it showed "not only that monetary policy has

relatively weak effects on financial stability .. but also the converse -- that,

partly because they're directed more at mitigating tail risks ..

macro-prudential policies do not have very large effects on demand and

inflation."

     Svensson, referenced by Broadbent in his speech, said in an updated paper

published this month that "there is little or no theoretical and empirical

support for monetary policy leaning against the wind (LAW) for

financial-stability purposes."

     LAW is setting monetary policy tighter, or looser, than would be justified

if only monetary goals were considered and financial-stability concerns were

excluded.

     --RIKSBANK LESSONS

     Svensson uses the Riksbank as a textbook example of what can go wrong when

financial stability concerns drive monetary policy.

     The Swedish central bank raised its policy rate from 0.25 percent in July

2010 to 2 percent in July 2011 because of worries about rising house prices and

household debt at a time when unemployment was elevated and projected inflation

low. Svensson said the central bank had not carried out analysis that suggested

such a policy was justified and, after sharp criticism, it ditched the approach.

     "The Riksbank made a complete turnaround in monetary policy in the spring

of 2014, about a year after I left the bank. It is no longer letting concerns

about household debt restrict monetary policy," Svensson said.

     --ONGOING CONCERNS

     Nevertheless, concerns about the housing market continue to haunt Riksbank

officials. Swedish house price continued to rise for much of 2017 before falling

sharply at the end of it.

     On one measure, the Nasdaq Valuegard index (HOX), they were down 4.5% in

the year to March while household debt levels remain elevated. The volatility

against a backdrop of high debt makes the Swedish housing market a financial

stability concern.

     "The structural problems on the housing market in Sweden are still a source

of concern and comprise a major risk for the Swedish economy. Lending to

households is continuing to grow at an annual rate of around 7%," Kerstin af

Jochnick, first Deputy Governor of the Riksbank, said in the February policy

minutes.

     The outcome of the April Riksbank policy meeting will be unveiled Thursday

and concerns about the housing market are very likely to emerge again in the

detailed discussion.

     The repo rate, however, is universally expected to be left unchanged at

-0.5% with the Riksbank no longer using its policy rate to try and either cool

borrowing or smooth house price movements.

     On the housing market "a lot of work remains to be done, and in several

different policy areas," af Jochnick said, while advocating leaving monetary

policy unchanged.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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