Setting the repo rate – a look behind the scenes

Date 17/04/2009

Most people probably realise that a lot of hard work goes into deciding what the repo rate should be. But how is this 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 low and stable. To achieve this, a number of monetary policy decisions are implemented. The process behind every report on the repo rate and the future repo rate path, that is the Monetary Policy Reports, takes about six weeks.

 

The work begins with a discussion of various risks and the possible alternative routes for the development of the economy. Some 50 people from the Monetary Policy Department and other departments at the Riksbank, for example the Financial Stability Department, are involved in the work. The members of the Executive Board are also already involved at this stage. The Executive Board is made up of the six people, led by the Governor of the Riksbank, Stefan Ingves, who make the final decision on the level of the repo rate. Following the discussions about potential risks and the development of the economy, a number of meetings are held at which personnel at the Riksbank present information and new statistics. At a so-called current status meeting, an up-to-date picture of the forecast for GDP, retail trade figures, the labour market and the Consumer Price Index for Sweden is presented.

 

Jesper Hansson, who is Deputy Head of the Monetary Policy Department and the person responsible for the Monetary Policy Reports, points out that these meetings are discussion meetings at which everyone has the opportunity to ask questions.

 

"We discuss, for example, the economic situation in both Sweden and abroad. Internationally, the main focus is on the USA and the Euro area. What is the situation on the stock market? How do the various players expect the repo rate to develop? Other areas we discuss include currencies and commodity prices," says Jesper Hansson.

 

The report takes shape

In parallel with the various meetings, the content of the Monetary Policy Report begins to take shape. It consists of three chapters and a number of in-depth articles ("boxes"). Each chapter is written by one or two authors. The authors receive comments on their texts from several quarters, including the heads of the various divisions at the Monetary Policy Department, the members of the Executive Board and editors who examine the texts to make sure they are clear and easily understood.

 

Using a modelling tool called Ramses, a macro forecast is then produced for three years ahead. This forecast covers GDP, interest rates, inflation, exchange rates and the number of hours worked. 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.

 

The details of the forecast are chiselled out

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

 

The process then continues with two days of meetings in preparation for the final monetary policy meeting. These meetings are well attended and sometimes there is not an empty chair in the room. 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.

 

Stefan Laséen works at the Modelling Division of the Monetary Policy Department.
"Our work aims to provide the Executive Board with as good a basis for their decision as possible. This is a task that is shared between the personnel at the Modelling Division and those at the Forecast Division," says Stefan Laséen.

 

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 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," says Jesper Hansson.

 

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 Secretariat now prepare to communicate and provide information about the monetary policy decision both internally and externally. The Press Office, for example, conducts a filmed rehearsal with Stefan Ingves, the Governor of the Riksbank, and Anders Vredin, Head of the Monetary Policy Department, who will hold a press conference on the following day.

 

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 usually well-attended press conference is then held.

 

After a few days, printed versions of the report are published in Swedish and English. 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 Monetary Policy Update, which begins five weeks later.

 

 

 

The Monetary Policy Process Week 1 Discussion of risks; meetings on financial markets, 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 Monetary Policy report and press release. Information for personnel. Press conference. Meeting for financial analysts. Evening meeting for market participants

 

Read more

Read more in an article about the monetary policy process via the link below.