Other countries with a flexible exchange rate and an inflation target have had similar experiences, for example Australia, Canada and New Zealand. It not only complicates assessments of the future path but also probably entails costs in the form of a poorer real economic trend. Conclusion Monetary policy in Sweden has been conducted with an inflation target and a flexible exchange rate since January 1993. The results have been good in many respects. Since the upturn in the summer of 1993, growth has been good compared with, for example, the years of high activity in the late 1980s. In contrast with that period, moreover, inflation has been low. Another point worth noting is the good real wage trend. With the low price rise, the annual real wage increases have averaged 2.5 per cent since 1994, which is more than in the 1980s, for example, when nominal wages rose rapidly but what households actually gained in real terms was very modest. BIS Review 81/1998  -7Monetary policy also seems to be better understood. Presumably this is mainly because, in spite of everything, economic development in recent years has been relatively good. The change in attitudes is evident in surveys of how people perceive the Riksbank and monetary policy. A similar picture is obtained from the treatment of the Bank and monetary policy in the Swedish press. Our basic line of thought has been broadly accepted, though from time to time there has naturally (and sometimes perhaps even rightly) been criticism of what we do.
Subdued inflation expectations and restrained wage demands pointed in the same direction. In view of a weak development of international activity, it was foreseen that full capacity utilisation in the Swedish economy would not be reached until the end of the forecast period, when inflation was assumed to be marginally above the target. This called for a readiness to undertake some cautious tightening of the monetary stance later in the year. At the same time, the spectrum of risks had shifted, with less risk of inflation exceeding its expected path but a continued risk of development being weaker than in the main scenario. In view of the uncertainty, the Riksbank chose to await future developments. •  BIS Review 81/1998  At the beginning of the summer we observed that inflation was following a lower path than we had assumed in the main scenario in March. Weaker import prices were contributing to this but so were other factors. Transitory effects - lower interest rates and changes in indirect taxes and subsidies - were particularly prominent. Moreover, on account of lower wage increases and stronger productivity growth than expected earlier, it seemed that inflation in the longer run would be somewhat lower than the Riksbank had predicted. With the outlook for productivity, it was likely that some surplus capacity would continue to exist during the whole period. -3All in all, inflation prospects one to two years ahead were accordingly more subdued than before and predicted inflation was below the target throughout the forecast period.