Setting the repo rate – a look behind the scenes

Most people probably realise that a lot of hard work goes into deciding what the repo rate should be. But how is it actually done and who is involved in the process?

 

The aim of monetary policy is to maintain price stability, which in the Riksbank's interpretation means that inflation should be 2 per cent. To achieve this, a number of monetary policy decisions are implemented. Producing background material as a basis for the monetary policy decisions takes up to six weeks.

 

The work ahead of the monetary policy meetings begins at the Monetary Policy Department. Christina Nyman, who is Deputy Head of the Monetary Policy Department and responsible for the Monetary Policy Reports, explains that on the basis of a discussion of financial conditions and forecasts of developments abroad and in the Swedish economy, as well as relevant uncertainties and risks, the Department produces an internal document outlining its view of how economic activity and inflation will develop in the period ahead. The Department also produces alternative scenarios for potential economic developments. All of this is then reported to the Executive Board. This document is gradually revised to form a Monetary Policy Report and functions as a basis for the monetary policy decision.

 

- In the monetary policy process it is important to leave no stone unturned and that different points of view are considered. This is done at a number of discussion meetings and ensures that the Executive Board is presented with a sound basis for its decisions. "The Financial Stability Department and the Markets Department are also involved in this work," says Christina.

 

Among other things, a modelling tool called Ramses is used as an aid in the analysis work. With the help of Ramses, forecast proposals for GDP, inflation, the exchange rate and the repo rate three years ahead are produced. The model is constantly under development and an ongoing research project is attempting to adapt the model so that it can take account of the fluctuations on the labour market and the workings of the financial markets.

 

"We then produce a detailed forecast of what the Riksbank believes regarding the Swedish economy in the future," says Mattias Erlandsson, Head of the Forecast Division at the Monetary Policy Department.

The details of the forecast are chiselled out

Once the departments have produced their background material, the process continue with two days of meetings in preparation for the final monetary policy meeting. The days are spent examining and discussing new statistics, the international forecast, detailed studies on topical subjects and the forecast for the Swedish economy. The Executive Board members put detailed questions to the experts present at the meetings.

 

At this stage of the process, the members of the Executive Board can still order new scenarios from the personnel. The time is now approaching, however, for the members of the Executive Board to present their own personal views on the forecasts and thereafter to begin the discussions that will eventually lead to the adoption of a repo-rate path with possible alternative scenarios.

The report takes shape

In parallel with the various meetings, the content of the Monetary Policy Report begins to take shape. It consists of four chapters and a number of brief articles. Each chapter is written by one or two authors. The authors receive comments on their texts from several quarters, including the various managers at the Monetary Policy Department, the members of the Executive Board and editors who examine the text to make sure it is clear and easily understood.

The repo rate is set

A first draft of the Monetary Policy Report is now written in close collaboration with the Executive Board. Following this, the Executive Board meets several times to discuss the forecast and the content of the Report. After this it is finally time for the formal monetary policy meeting.

 

"Following renewed discussion of the economic situation, all of the members of the Executive Board now present their own opinions on the monetary policy that should be adopted. Towards the end of the meeting, they vote on the level that they believe the repo rate should be set at. They also vote on the future repo-rate path and on whether other, complementary monetary policy measures are needed," says Christina Nyman.

 

The final touches are now made to the report, and the press release that will announce the decision is prepared. The personnel at the Communications Division now prepare to communicate the monetary policy decision, both internally and externally.

The big day arrives

The press release and the Report are published on the Riksbank's website at exactly 9.30, followed by a number of updates. At 9.45, one of the members of the Executive Board and a representative of the Monetary Policy Department inform the Riksbank's personnel about the repo-rate decision. The often well-attended press conference is then held.

 

The personnel at the Monetary Policy Department can now take some time to get their breath back but they soon have to start girding their loins for the work on the next monetary policy decision, which begins a couple of weeks later.

The monetary policy process

The process varies in length but an example of a possible schedule is presented below.

 

Week 1 Discussion of risks; meetings on financial market, international outlook and current status.
Week 2 Macroeconomic forecast; writing of texts for the Report begins.
Week 3 Detailed forecast produced and the two monetary policy group meetings held.
Week 4 Executive Board meeting on the forecast.
Week 5 Executive Board meeting on the text of the Report.
Week 6 Monetary policy meeting, publication of the Monetary Policy Report and press release. Information to personnel. Press conference. Evening meeting with market participants.

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