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14 Jun 2013
Flash: Monetary policy needs revamping in Nordic countries? – Goldman Sachs
FXstreet.com (New York) - “Much has been made of the below-target inflation in Scandinavia, which is the result of external factors (exchange rate and foreign prices) that are largely exogenous to the Riksbank and Norges Bank.” notes the Economics Research Team at Goldman Sachs.
Domestic inflation is currently around target and a sizeable easing would be required to raise domestic inflation sufficiently to reach the aggregate inflation target in the near term. Such easing would come with risks: creating a sizeable domestic boom risks spurring excessive credit growth and would likely result in more volatile monetary policy in the medium term.
According to the team, “This suggests that small (very) open economy inflation targeters, such as the Riksbank and Norges Bank, should adopt a longer-than-usual time horizon for monetary policy.” The Riksbank and Norges Bank appear effectively, although not officially, to have done this. This underlies our view that both central banks will hike in 2014, despite a below-target inflation rate, as imported inflation (exogenously) reverses its recent declining trend, and in order to limit the upward trend in domestic inflation and credit growth.
Domestic inflation is currently around target and a sizeable easing would be required to raise domestic inflation sufficiently to reach the aggregate inflation target in the near term. Such easing would come with risks: creating a sizeable domestic boom risks spurring excessive credit growth and would likely result in more volatile monetary policy in the medium term.
According to the team, “This suggests that small (very) open economy inflation targeters, such as the Riksbank and Norges Bank, should adopt a longer-than-usual time horizon for monetary policy.” The Riksbank and Norges Bank appear effectively, although not officially, to have done this. This underlies our view that both central banks will hike in 2014, despite a below-target inflation rate, as imported inflation (exogenously) reverses its recent declining trend, and in order to limit the upward trend in domestic inflation and credit growth.