Another problem sometimes mentioned is that there may be difficulties in communication in the cases where the central bank has a different view from the market as to what constitutes a reasonable future development for the policy rate. 7 The forecasts for developments in the real economy and inflation that are published will under such circumstances not be the ones that the central bank believes to be the most likely and the value of the published forecast is therefore diminished. This is the same type of problem as with constant repo rate forecasts, although the problem is probably less on average over time. Most of these problems can be avoided if the central bank instead bases its inflation forecasts on its own forecast for the development of the policy rate. 8 However, the primary reason for publishing one’s own interest rate forecast is that it makes it easier for the central bank to steer expectations. With this assumption for the interest rate, the central bank can explain more clearly to the general public and the financial markets how it envisages future interest rate developments and how it reasons when making monetary policy decisions. The interest rate development that follows on from market expectations does not always give a good picture of all of the considerations a central bank must make when discussing what provides a reasonable development in interest rates.
“A desirable monetary policy is characterised by inflation under normal circumstances being close to the inflation target in a two-year time perspective while at the same time the paths for inflation and the real economy do not exhibit excessively large fluctuations.” Given this reasoning, I think it is possible to identify some important characteristics of a good interest rate path. Firstly, the interest rate should be set so that inflation remains close to the 2 per cent target. If inflation were to deviate from target from the start, we should normally choose a path for the repo rate that brings inflation back on target within two years. Moreover, this path should be chosen so that inflation is close to target even beyond the two-year horizon. This way of conducting monetary policy helps reduce uncertainty and anchor inflation expectations around the target. The interest rate should also be set to achieve as far as possible a stable, sustainable development in the real economy, as long as this is compatible with the price stability target. Let us say that the  11  See, for instance, Giavazzi, F., and F. S. Mishkin (2006). 12  See also Rudebusch, G.D. and J.C. Williams (2006). 13  See the box ”Uncertainty regarding future interest rate movements” in Inflation Report 2006:1 for some examples of how to produce such uncertainty intervals. 14  See the memorandum "Monetary policy in Sweden” which can be downloaded from the Riksbank’s website, www.riksbank.se or ordered as a printed document.