Abstract
Economists often provide predictions about future interest or policy rates. In contrast to stock market predictions, these forecasts are typically regarded seriously and presented with a degree of accuracy. This paper explores whether placing more confidence in policy rate predictions than stock market predictions is reasonable. It begins by examining historical policy rates predictions in Sweden, comparing them to actual rates to assess their accuracy. The paper then delves into the discussion of how costs of mispredictions, such as sudden and unexpected policy rate increases, can and should be addressed. Despite the Central Bank making predictions within confidence intervals and the banking sector regulating individuals’ borrowing, the burden of unpredicted rate increases falls almost entirely on individuals. The paper addresses whether that is reasonable.
![Mean monthly Central Bank policy rates in Sweden, 1998-2022. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g001.png)
![Actual policy rates and rates forecasted at various times, 2008 to 2025. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g002.png)
![Actual policy rate at different times and the size of mispredictions at that time Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g003.png)
![Coefficient of variation of predicting policy rates, 2008-2023. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g004.png)
![Forecast deviations from actual rates, forecasts between 2007 to 2023, percentage points. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g005.png)
![Accuracy, measured as standard deviation, for different forecasts, 2007 to 2023. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g006.png)
![Coefficient of variation for various predictions, 2007 to 2023. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g007.png)
![Policy rate forecast and confidence interval, Forecast Nov 2021 Percent. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g008.png)
![Predictions within different confidence intervals, May 2014 to Feb 2023. Source: Monetary Policy Report, Riksbanken [4].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g009.png)
![Household debt in OECD countries, percent of net disposable income in 2021. Source: OECD [7].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g010.png)
![Average interest rates for new loans, secured and unsecured, 2012-2022. Source: Finansinspektionen [5].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g011.png)
![Public debt in OECD countries, percent of GDP in 2021. Source: OECD [8].](https://www.igminresearch.com/articles/figures/igmin116/igmin116.g012.png)
