The Riksbank’s simple rule of thumb

One of our Swedish analysts, Andreas W. Jonsson, have just published an interesting update regarding The Riksbank’s simple rule of thumb.

The Swedish Riksbank follows labour market trends closely. In situations with rising unemployment the Riksbank has lowered its repo rate and vice versa. Indeed, our estimation shows that variations in unemployment have explained no less than 95% of the variation in the repo rate over the last decade. Inflation, resource utilisation, random factors etc explain the remaining 5%.

Our estimation boiles down to the following simple relationship between the repo rate (r) and unemployment rate (u):

r = 12 – 1.4*u

We forecast Swedish unemployment to rise gradually, reaching a peak around 8.4% in 2013. Here the model indicates that the repo rate should bottom around 0.6%. In all, the future trend in unemployment will be highly interesting – also from a monetary policy perspective.

Read more in the full report below.

Best regards,
Mikael Sarwe

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