Karolina Ekholm: The role of forecasts in monetary policy Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, held at Handelsbanken, Stockholm, 11 May 2010. *  *  *  The theme I have chosen for today’s speech is the role of forecasts in the monetary policy decision-making process. Given the events in recent days, I realise that many people are probably more curious about how we at the Riksbank view the problems with public finances in southern Europe than about our methods for making and using forecasts. So I shall begin with a few words about this. The EU countries have now decided to implement several measures aimed at preventing the public finance problems in Greece from creating new problems in the financial markets and possibly leading to a new economic downturn. The Riksbank considers it a very positive sign that a large rescue package with measures has now been presented to promote financial stability in Europe. We all gain from safeguarding stability. However, it is still too early to say exactly what effects the new package will have. Here in Sweden the financial markets are functioning, but this does not rule out the possibility that they will suffer contagion effects from the international financial markets. Swedish banks have only small direct exposures towards the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) and are well-capitalised in an international comparison. However, the Riksbank follows developments closely and has regular contacts with Swedish banks and with other central banks.
The more information we receive on the effects that different risk scenarios have on the economy, the clearer the base for the monetary policy decisions will be. Then it is necessary for decision-makers to realise that it is not always possible to explicitly include all possible scenarios in the forecast. Sometimes this is impossible due to lack of resources. In principle, we Executive Board members have insight and the possibility to discuss the forecasts with the Monetary Policy and Financial Stability Department throughout the whole of the forecasting process. We can then question the assessments made. The Board members’ assessments of which risks are most relevant for the decision naturally also affect which analyses are made by the Monetary Policy Department. The analyses published in Monetary Policy Reports and Updates are normally just one part of those made during a forecasting round. Of course, the entire Executive Board does not always agree with the analyses presented as these are the results of a compromise where the different opinions are weighed together. But in this case it is clear, either from the Board member’s contribution to the debate as published in the minutes, or in the form of a reservation entered. In this way the general public has very good insight into how we Executive Board members have though when making our decision. BIS Review 65/2010  7