Forecasting Errors Reveal Swedish Riksbank’s Fall From GraceJohan Carlstrom
Sweden’s central bank has gone from best to worst among its peers at forecasting inflation.
The errors can be traced back to 2010. That’s when policy makers, led by Governor Stefan Ingves, started raising rates in the middle of Europe’s worst economic crisis since WWII. Ingves said at the time the Riksbank was fighting the risk of an overheated housing market.
Since then, the bank lagged behind its peers in predicting inflation. After being the best in 2008 and 2009, the Riksbank was overtaken by the U.S. Federal Reserve, the European Central Bank, Bank of England, Swiss National Bank and Norges Bank, according to a Bloomberg News study of central bank forecasts and price data from 2008 through 2013.
Jesper Hansson, who stepped down as the Riksbank’s head of forecasting in 2011 for the same job at Sweden’s National Institute of Economic Research, says the verdict is clear. “They’ve been exposed” and “can’t escape that,” he said in an interview. “It’s tough for them to very clearly say that we’ve abandoned the inflation target for the next few years because other things are more important.”
Consumer prices have declined on an annual basis in 11 of the past 13 months and haven’t reached the 2 percent the Riksbank targets since late 2011. Unemployment remains close to 8 percent, Scandinavia’s highest rate. The Riksbank is now in the middle of a major policy reversal as it tries to undo the mistakes of 2010 and 2011. Measures this year have included negative rates and a bond-purchase program.
The Riksbank isn’t alone. The European Central Bank on Monday started its bond purchases designed to boost inflation in the euro region. Swedish debt rose, with two-year yields sliding to minus 0.15 percent from minus 0.13 percent.
Critics say the Swedish bank could have avoided cutting rates below zero -- a measure that puts considerable strain on the financial industry -- had it acted sooner. The editor-in-chief of Sweden’s biggest newspaper, Dagens Nyheter, has even called for Ingves’s resignation.
During a trip to Helsinki on March 3, Ingves defended the Riksbank’s policies. “Sweden is doing well at the moment,” he said. The economy is enjoying an “odd situation, with low inflation and good growth.”
The Riksbank estimates headline inflation will average 1.9 percent in 2016. That’s almost double the 1 percent that the National Institute of Economic Research predicts.
“You get the sense this is a foregone conclusion,” said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. No matter what happens, “the inflation forecasts have still ended up at 2 percent.”
The Bloomberg study, which compares central bank year-end forecasts with actual outcomes, shows the Riksbank did better than its peers more than half the time in the two years before 2010. Since then, it has done worse in almost two-thirds of the forecasts.
The study shows the Riksbank continuously overestimated inflation since 2010. That led to a lot of adjustments, as reality failed to match the Riksbank’s predictions. It has cut its inflation forecast in 10 of the past 13 meetings.
“You must be able to set a higher standard for a central bank given the resources they have,” said Robert Bergqvist, a former researcher at the Riksbank who is now chief economist at SEB AB in Stockholm.
Before stepping down in October, Deputy Governor Karolina Ekholm said the bank was making “systematic” errors, assuming inflation would be higher than it was, by adjusting predictions derived from models. The reluctance to cut rates has put a lid on prices by strengthening the krona and depressing demand, she said.
It’s “important that the decisions are based on forecasts that don’t exhibit bias,” Ekholm said in the minutes of the September rate meeting. “Biased forecasts provide an incorrect picture of the trade-offs facing the decision-makers.”
She’s not the only critic from inside the bank. Lars E. O. Svensson resigned from the board in 2013 following years of disagreement with Ingves over the bank’s forecasts. Svensson is one of the world’s leading researchers on inflation targeting.
Nobel Laureate Paul Krugman, a former colleague of Svensson at Princeton University, last year famously called Ingves and his colleagues “sadomonetarists.”
The bank says price pressure from outside Sweden and weak demand at home have made it hard to reach the target, regardless of monetary policy. Ingves also argues that the Riksbank’s inflation targeting credentials should be based on a gauge that strips out the effect of mortgage costs. Using this measure, annual consumer prices haven’t fallen since at least 1980.
“From a Swedish point of view, we don’t see deflation ahead of us,” Ingves said in Helsinki.
But the comments may disguise concerns held by others at the Riksbank.
“I think there are several people at the Riksbank who are worried about how they will be able to reach 2 percent at the end of the forecasting horizon,” said Annika Winsth, chief economist at Nordea Bank AB in Stockholm. “But they have to write that because that’s their target.”
According to Hansson at the National Institute of Economic Research, the reason for the big forecast misses could be that Riksbank forecasters have tended to produce views that please the board. NIER’s latest prediction shows inflation, excluding mortgage costs, will average below 2 percent until 2019. The Riksbank estimates it will reach the target already next year.
“It’s a bit easier to present results that top management wants,” Hansson said.