This means that the Riksbank must make assessments of how the krona will develop in relation to other currencies during the forecast period, and assess what effect the development of the krona will have on demand for Swedish goods, as well as the impact the krona will have on consumer prices. None of these assessments is simple. Allow me first to point out the mechanisms that are important with regard to a direct impact on inflation via import prices. If the krona weakens and prices on the goods we import are determined in the exporter’s home country currency, the weaker krona will have a direct impact on import prices. For the weaker krona to have a full impact on prices of imported goods in the consumer channel, all domestic intermediaries must pass the price increases on to the end consumer. During the years with a floating exchange rate we have been able to note that the weakening of the krona has not had the impact on consumer prices that we had expected. One explanation could be that internationalisation and increased competition have first and foremost meant that the exporting companies endeavour to adapt their prices to developments on the markets where they sell, in order to retain their market share. It is reasonable to imagine that large corporations with sales and production spread around the world can act in this way without facing large fluctuations in profits.
A prolonged surplus on the current account will sooner or later strengthen the nominal exchange rate so that a balance is achieved. However, this can evidently take longer than expected. BIS Review 79/2001  3  Although the long-term value of the krona is determined by flows of goods and other items in the current account, its price is governed in the short term by supply and demand on the foreign exchange market, and here other factors can prevail. Developments on the financial markets have led to rapid and substantial portfolio transfers when, for instance, Swedish investors have bought shares abroad or foreign investors have sold Swedish shares. Changed expectations of earnings on various shares and changes in the willingness to take risks appear to have increasingly governed the developments on the foreign exchange markets in a way that is not captured by traditional exchange rate models. Portfolio transfers as a result of deregulation or changes in investment regulations may also have had significance. In the long term, however, it is difficult to believe that anything other than the development of the fundamental economy shall determine how the exchange rate develops. Regardless of which model we apply to explain the krona rate, it will show that the krona is undervalued and has been so for a long time. Despite the difficulties connected with forecasting exchange rates, we have to make assumptions regarding the development of the krona in our assessments of inflation.