MNI INTERVIEW: Law Will Encourage Riksbank Inaction-Skingsley

Swedish legislation set to come into force in the new year giving a parliamentary committee the power to oversee the use of financial stability tools will reduce the central bank’s willingness to respond to future shocks with packages such as the measures enacted in response to the Covid pandemic, Riksbank First Deputy Governor Cecilia Skingsley told MNI.

The revised Riksbank Act will require approval from parliament’s Committee on Finance for any measures taken to ensure financial stability, a broad term which could possibly extend to policy tools such as asset purchases. In response, Executive Board members may opt to avoid potential arguments with lawmakers, and tend to stay on the policy sidelines, Skingsley, said in an interview late last week.

"My fear is that the way the Act has been designed is that it will cause an inaction bias at the central bank governor's level, both when there are inflation troubles and also in a crisis situation," said Skingsley, who is leaving the Riksbank next month, with the June decision to hike the policy by 50 basis points to 0.75% her final one.

Following the Covid shock in March 2020, the Riksbank launched a raft of measures including asset purchase programmes, later adjusting them. In future any such response would require parliamentary scrutiny at various stages, which Skingsley said would reduce the capacity for monetary policy to react in a timely manner. Policy decisions will also be scrutinised by the National Audit Office.

"We are now living in a world .... where you have to be pretty forceful and nimble as a central banker," Skingsley said. “It is really hard to make this division between what is monetary policy, where we have full control, and over what is financial stability, where we don't have full control.”

EXPOSED TO CRITICISM

Whilst the Act, which has strong cross-party support, has been amended to allow for the Riksbank to take measures without seeking authorisation in a crisis, Skingsley pointed out that it would still be asked to justify itself later.

“There is now an opening in the Act saying if it is urgent enough the Riksbank can make its own decisions, but we will always have that discussion afterwards ... Was it so urgent you needed to act so quickly?” Skingsley said, adding that allowing lawmakers to pass retrospective judgement over urgent policy moves could expose the independent central bank to unfair criticism.

“The economy recovers, asset markets take-off -- you get the blame for that, saying 'You did too much and now we have an inflation problem', whereas if the central bank had done nothing for weeks and weeks you might possibly have been in a much worse situation. So it is fair to say that you are doomed either way," she said.

"If you look at it from the perspective of an individual board member … it becomes easier to sit on the sidelines. I think it is going to be more difficult to be the Governor in a future crisis. I see a risk of longer, more difficult discussions. And I can tell you it is pretty difficult as it is," she said.

While the Act envisages eventually reducing the six strong policy making board to five, this provision will not have any immediate impact.

“I'm leaving in a month and the current General Council can very happily appoint a successor to me. They can certainly stay at six for quite some time,” she said.