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UPDATE 2-Landmark report says Swedish central bank should have broader focus

* King/Goodfriend recommend 2 pct CPIF inflation target

* Riksbank should have leeway to deviate from target if merited

* Report recommends change in board structure (Adds details throughout)

STOCKHOLM, Jan 19 (Reuters) - Sweden’s Riksbank should be able to suspend inflation targeting and focus on the economy’s broader health during times of economic turmoil, according to an independent report that may offer lessons for other central banks.

The study, by former Bank of England governor Mervyn King and U.S. economist Marvin Goodfriend, also recommends that Sweden drop its target of 2 percent headline inflation in favour of the CPIF measure, which excludes interest rate changes.

Finance Minister Magdalena Andersson told Reuters it was time for a broad discussion about the Riksbank’s mandate, which is set by parliament, adding: “And there we see that this (report) will be very important input in that work.”

Commissioned by the Riksbank after criticism that its pursuit of an elusive inflation target stoked a housing bubble and caused it to overlook deflation risks, the report could give impetus to reform of the world’s oldest central bank.

Similar issues are being debated by policymakers worldwide as they struggle with persistently low growth and inflation running close to or even below zero.

The report confirmed a summary seen by Reuters.

King told a news conference on Tuesday that in periods of economic turmoil, central bankers needed to focus on the big picture of huge imbalances within national economies and the rest of the world rather than exactly meeting inflation targets.

“All of these things suggest that the central bank needs to have the ability to say we are not going to behave precisely to bring inflation back to 2 percent over a two-year horizon,” he said, noting there were limits to the power of monetary policy.

“We’ve thrown the kitchen sink at the problem and it still hasn’t gone away,” King added. “That suggests there is more to the problem than simply what is the degree of tightness of monetary policy.”

The central bank has undershot its 2 percent inflation target for years, as have peers with similar targets including the European Central Bank and the Bank of England.

The report highlighted often rancorous divisions among board members over the pace of rate changes, saying “the scale of differences of opinion and above all how they were expressed damaged the Riksbank’s reputation”.

Critics say the Riksbank woke up too late to the threat of deflation because it was worried about high levels of household debt that prompted it to raise interest rates in 2010 and 2011.

Nobel Laureate Paul Krugman called the central bank’s policy “sadomonetarist” while Fed chief Janet Yellen has said those hikes were premature. King and Goodfriend disagreed, however, saying in their report that the Riksbank’s decisions were reasonable given the information available at the time.

More recently, ultra-loose monetary policy intended to stimulate inflation has been blamed for rampant Swedish house prices.

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Analysts said that if the report’s recommendations were accepted by the Swedish parliament, they could lead to more flexible monetary policy.

“Given the strong Swedish economy and the elevated credit growth, this points to a less accommodative monetary policy stance and gives no support for additional stimulus measures,” Nordea analyst Torbjorn Isaksson said in a note.

Although King and Goodfriend rejected the idea of targeting employment as well as inflation, Andersson said the report had strengthened her conviction that it would be reasonable. The Federal Reserve has such a dual mandate.

The Swedish crown strengthened slightly on Tuesday, to around 9.32 per euro at 1306 GMT.

The central bank welcomed the report and said it was analysing its findings.

King and Goodfriend also recommended a change to the structure of the Riksbank’s board and said the central bank should have a clearer role in policing threats to the economy.

They criticised the board for having too much faith in models for forecasting inflation and future repo rates, leading to a wide difference between the Riksbank’s prognoses and those made by the markets. “A greater humility regarding these models would not have been out of place,” the report said.

An enquiry should look into how responsibility for financial stability is divided between the Financial Supervisory Authority and the Riksbank, the authors said.

The FSA was given the primary responsibility in 2013 for finding measures to head off a housing bubble, but efforts have hit legal hurdles and a plan to introduce tighter mortgage repayment rules has been delayed until June.

Swedish households are among the most indebted in Europe, leading to worries that any fall in sky-high house prices could flip the fast-growing economy into recession.

Writing by Simon Johnson; Editing by Alistair Scrutton and Catherine Evans

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