Banker Bot Can’t Figure Out Why Everyone Saw a Riksbank Hike
There’s a robot that’s been trying to predict central bank moves since May. But when it comes to Sweden, the humans setting policy at the Riksbank are proving way too inscrutable.
Economists (humans) had agreed that the Swedish Riksbank was going to take a historic step away from negative rates Thursday, and raise the benchmark repo rate to zero. Their expectations proved right as the central bank decided to exit almost half a decade of negative rates by lifting the rate by 25 basis points to zero. But the move isn’t entirely logical, according to the robot at Nordea Bank Abp.
For now, Nordea’s robot seems to think that the economic data doesn’t really justify a hike. That in turn “suggests that there are different incentives than you normally have to raise the repo rate,” said Anders Svendsen, an economist at Nordea in Copenhagen who is one of the main architects behind the robot.
The algorithm used by Nordea, the biggest Nordic bank, is clever enough to analyze text deviations from previous statements. For example, it would have identified “whatever it takes” as a key indicator from the European Central Bank back in mid-2012.
The robot, which has its own twitter handle, is based on a model of analysis that is still being refined. Svendsen says it “typically predicts rate changes at the nearest two meetings. It is used as a supplement to analysts’ predictions.”
It’s worth noting that the robot seems to be in agreement with roughly 40% of clients at Danske Bank, who said that even though a Riksbank hike this week seems inevitable, it’s not actually a good idea.
The stakes are high and the Riksbank has been burned before. In 2010, its decision to raise rates at the height of Europe’s debt crisis proved a blunder that drew the derision of members of its own board. Nobel laureate Paul Krugman famously referred to the misstep as an example of sadomonetarism.
Svendsen says that Nordea will “trust analysts more than the model, but if there is a difference, then it gives a reason to question the analysts’ views and make sure that we understand what’s actually going on, and that we haven’t missed something.”
The Riksbank has exited negative rates even though inflation isn’t quite at its 2% target and economic growth is slowing. Thursday’s hike comes as subzero rates grow increasingly controversial, with banks and pension funds in particular complaining of the upside-down world the policy has created.
The central bank said Thursday that the repo rate is expected to remain at zero “in the coming years” and kept a goal of purchasing bonds through so-called quantitative easing until the end of 2020. The decision matched market expectations, and the krona and Swedish bonds were little changed after the announcement.
With time, the Nordea robot might even be able to read the kind of bias that the Riksbank is displaying.
“This is a developing field and everybody, including the big central banks, is learning more and more about how to use data-driven analysis,” Svendsen said.
“It’s a bit of a battle between the central banks trying to understand how they’re being perceived by these models and the financial industry trying to develop the models to predict what the central banks are going to do,” he said.
©2019 Bloomberg L.P.