Riksbank says own inflation forecasts are among least accurate

Sweden’s central bank says that its own estimates of the country’s future policy rate and of some inflation measures have been among the least accurate of all forecasters.

Sveriges Riksbank reached this conclusion by studying the accuracy of forecasts published over the last 10 years by itself and by other organisations. The variables forecast included GDP growth, the policy repo rate and two measures of inflation: the consumer price index (CPI) and CPI with a fixed interest rate (CPIF).

The Riksbank overestimated the rise of inflation in 2016 in the forecasts it made at the beginning of 2015, the study finds. In February 2015, it forecast that 2016 would see CPI inflation of 1.9% and CPIF figures of 2%, whereas the ex ante figures were 1% and 1.4% respectively. It also forecast a repo rate of 0% for 2016, whereas the actual figure turned out to be a negative rate of -0.5%.

These errors were in part due to weaker than expected cost increases for three variables, the study finds. Two of the variables were domestic Swedish factors – unit labour costs and rents – while the third was the rate of increase of world food prices. Sweden’s currency, the krona, also proved weaker than expected by the Riksbank, the study notes.

The Riksbank has an inflation target of an annual rise in the CPI of 2%. The Swedish CPI rate increased by 1.3% year-on-year in March this year.

The Riksbank had also forecast in 2015 that “companies would increase their margins as economic activity strengthened” over 2016, but this did not happen to the extent expected, the study notes. Another possible factor in keeping inflation low was the effect of falling inflation expectations, the authors of the study say. They note, however, that “this question is not explicitly analysed” in their work.

GDP over-estimation

Over a longer time horizon of 10 years, both the Riksbank and other economic forecasters have also on average overestimated both GDP growth and inflationary pressures, the study finds. It compares the central bank’s forecasts to the predictions of nine other institutions. These include Sweden’s ministry of finance, its leading employers’ organisation, its trade union confederation and academic think-tanks as well as several private banks.  

The Riksbank’s estimates of GDP growth over this period has nonetheless been more accurate than that of many other forecasters, the study finds.

The study does find that the central bank’s forecasting of CPIF inflation rates “have been more or less in line with the average among all forecasters”. But this does not hold true of its CPIF forecasts made for 2016 at the beginning of 2015, when the Riksbank “overestimated CPIF inflation more than others”, the study finds.

The study also says that the Riksbank’s estimates of the repo rate and CPI inflation “have been among the least accurate” of all the forecasters surveyed.

Overall, the central bank has “in recent years made relatively good short-term forecasts, both in relation to other forecasters and in relation to historical forecast errors”. Inaccuracy in the central bank’s GDP and inflation forecasts “mainly applies” to forecasts of “more than one year ahead”, the study says.

These errors over the long term “may be related to the Riksbank’s inflation forecasts being based on a monetary policy that normally ensures that inflation approaches the target of 2% within a couple of years”, the study argues.  But attaining this target “has been difficult in recent years”, due to global low interest rates and unconventional monetary policy in Sweden and elsewhere, the study notes.