Sweden’s central bank published a statement in response to the draft law, saying that the changes that were proposed to the law that governs its activities would limit its ability to intervene and be proactive in crisis situations, like the ongoing COVID-19 global pandemic. The central bank argues that such change would, in turn, increase potential risks to the Swedish economy, in terms of more jobs lost, a greater number of companies going bankrupt, and a general deterioration in economic activity.
An inquiry that was conducted last year, recommended major changes to how the Riksbank is regulated, defining the policy instruments that it should have, systematizing the role that it should have in preserving the financial stability of the country and, finally and most importantly, giving the parliament the final say in the inflation target. The proposed changes were seen as limiting the freedom of the central bank, which, under current rules, enjoys a wide scope of independence in conducting operations.
In the statement, the Riksbank explained their position, saying that they were in favor of the central bank getting the extended responsibility for cash management and crisis preparedness. However, their main objections to the Inquiry’s proposals came with the initiative to divide and demarcate the monetary policy and financial stability, which significantly limits the monetary policy toolbox that the bank currently has.
Taking Swift and Effective Action in A Crisis
The bank said in a statement that thus far, their actions taken against the ongoing coronavirus pandemic have shown the importance of Riksbank in alleviating the detrimental economic effects of a crisis situation. The actions of the bank showed the full capability of taking all necessary measures in supporting the government and the parliament in dealing with the current global crisis.
The bank argues that by restricting financial independence by, among other things, setting an upper limit for the size of its equity, the Riksbank would find it difficult to enforce measures rapidly, flexibly, and efficiently when required. “This increases the risks to the Swedish economy, especially in a crisis,” the central bank warned.
Adjusting interest rates are not enough to carry out the statutory tasks required from the central bank, the bank also needs to be able to sell various securities, give credit to the banking system, and buy or sell foreign currency, according to the statement.
“The proposed bill limits the Riksbank’s capacity to act, for instance by not allowing the Riksbank to purchase other securities than government papers, unless there are special reasons, or making lending to the banks conditional on them increasing their lending to companies,” reads the statement.
The approach that Sweden took to fight the novel coronavirus has been significantly different from the other countries. Instead of going under the lockdown, like many other countries around the world, Sweden enforced special measures and fully utilized social distancing, urging people to stay indoors, but not limiting their freedom of movement.
“We trust each other,” said Sweden’s Minister for Foreign Affairs Ann Linde. “The people trust the authorities and the authorities trust the people. And I think that’s one of the biggest differences.”
Guided by this trust, the steps that the government took helped to protect the economy, with the central bank playing a major role in aiding the economy. Over the years, Sweden’s market-oriented economy and national wealth have given rise to the country’s booming foreign-exchange market, with many foreign investors and brokers taking interest in this Nordic country. Swedish Forex brokers rating is significantly high, thanks to the magnificent economy that the country has managed to create. It should come as no surprise that in times of crisis, the government would do anything to best aid the market of this magnitude.
As mentioned, the swift response that the Swedish government, along with the Riksbank took to counter the global pandemic has been nothing short of amazing. However, the bank noted in the statement that if the current proposals were already in place, its response to the novel coronavirus would have been way less successful.
“If this bill had applied now during the coronavirus pandemic, it would have limited the Riksbank’s monetary policy toolbox and it would have been unclear what the Riksbank was allowed to do,” read the statement.
The statement also emphasized that in order for the Riksbank to be financially independent, its equity and earnings potential must be sufficiently high to fulfill its mission and preserve confidence in its ability to aid the government in normal circumstances and especially in an event of a financial crisis.
The aim of the proposed bill was to modernize and clarify the mandate of the Riksbank, however, as the statement notes, the goal was not achieved, as it makes it more difficult for the central bank to take appropriate measures in a quick, flexible and efficient manner whenever necessary. Such hindrance to the work of the central bank could lead to detrimental effects that would significantly hurt the Swedish economy. The central bank thinks that the final legislative proposal should contain less micro regulations and more changes in response to the ongoing challenges.
