UPDATE 2-Swedish c.bank chief says Riksbank law draft raises risk to economy

(Adds further c.bank comment, background)

STOCKHOLM, May 31 (Reuters) – Proposals for a new framework for Sweden’s central bank would restrict its ability to react effectively and rapidly in times of crisis and lead to greater risks for the development of the economy, Riksbank Governor Stefan Ingves said on Monday.

Last week, the government published its proposals for a new Riksbank law, arguing current legislation was out of date and needed modernizing in the wake of developments in financial infrastructure and the experiences of the financial crisis of 2008-9 and the pandemic.

It said the proposed new law was aimed at clarifying which policy tools Riksbank should have and the division of labour between the central bank and the financial watchdog in terms of ensuring financial stability.

But Ingves said the proposal was “the wrong way to go”.

“The Government’s proposal will … make it more difficult for the Riksbank in future to rapidly, flexibly and efficiently implement measures when needed – and this increases the risks to the Swedish economy,” he said in the text of a speech published by the central bank.

Ingves told reporters that the proposed new law, which if it passes parliament would come into force in 2023, would only allow the Riksbank to buy assets that were not government bonds under “extraordinary circumstances”, leaving a grey area in terms of when it could act.

“You also need the capacity do to it,” Ingves said “And you can only do that be being in the market the whole time.”

During the pandemic, the central bank launched a raft of measures including loans and asset purchases to support credit supply and liquidity in the banking system.

Its decision to buy mortgage-backed bonds – despite warning for years of an overheated housing market and high levels of household debt – has been criticized by some analysts.

The government has said the new framework would not have a big impact on how the bank operates and would maintain the Riksbank’s current tool box, including the type of asset purchases and other measures it has used to fight the current pandemic.

Central banks have had to shoulder ever greater responsibilities for economic policy in recent years, often without a clear framework within which to work, and many countries are now looking at regulatory reform to improve the response to future crises.

Ingves said the distinction the draft law makes between price stability and safeguarding the financial system was “artificial”.

“This division means that the Riksbank will not be able to act as quickly and powerfully in the next crisis as we have been able to do during the pandemic,” he said.

Ingves added that the proposals did not comply with EU legislation.

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