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Riksbank off base with finance crunch rate hikes

The Swedish Riksbank has concluded that while everyone failed to see the impending finance crunch, it's own board was furthest behind.

Published: 15 March 2010 13:10 CET

The Riksbank has conducted its own forecasts for the development of the interest rate since 2009 but has been further off the mark than other market assessors, the new report shows.

“On average over the three years (2007-2009) all market assessors had a tendency to exaggerate the repo rate, but the Riksbank had the worst analysis of all five forecasters,” the Riksbank wrote in its own analysis report published on Monday.

Riksbank chief Stefan Ingves had to withstand a wave of criticism after hiking the bank’s main base (repo) rate in September 2008, just weeks before the collapse of Lehman Brothers which sparked the deepest recession since the 1930s depression.

The bank has now concluded that its own analysis is regularly after the curve. The report states that the worst errors were made in July and September 2008 with significantly over-optimistic inflation forecasts. These erroneous forecasts laid the basis for the interest rate rises in July and September.

The other market assessors compared in the study were The National Institute of Economic Research (Konjunturinstitutet – KI), the Ministry of Finance, SEB and Swedbank.

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Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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