It thus applies regardless of whether or not long-term interest rates are affected by depressed forward premiums (for instance, as a result of the Federal Reserve’s purchases of government securities). It also applies regardless of whether market expectations are good and reliable forecasters of future interest rates. The assumptions we make about long-term Swedish and foreign interest rates are thus important. This was one possible explanation why the main scenario contains such a modest krona appreciation. The other possible explanation and corresponding interpretation of the main scenario can be described as follows. In Figure 7 the red and yellow curves show the Riksbank’s forecasts for the repo rate and the TCW-weighted policy rates abroad, respectively. At the same time, the blue and grey curves show market expectations of the repo rate and the TCW-weighted policy rates abroad, respectively. If the current repo rate and the actual policy rates abroad develop over time according to the red and grey curves, the market will be surprised if the repo rate and foreign policy rates are raised more quickly  8  BIS Review 158/2010  than expected. The market will then gradually raise its expectations of future interest rates. That is, over time the blue and grey curves will show an upward shift. This means that the corresponding blue and grey yield curves in Figure 8 will shift upwards over time.
The decision-making process can then continue with forecasts for inflation and resource utilisation conditional on alternative repo rate paths, to determine which repo rate path is judged to best stabilise inflation and resource utilisation. These forecasts can be made under two different assumptions. One assumption is that the alternative repo rate path will become credible and be incorporated into market expectations. Forecasts under this assumption can be constructed by using what are known as anticipated deviations of the repo rate path  BIS Review 158/2010  11  (Laséen and Svensson 2010 and Svensson 2010b). The other assumption is that the alternative repo rate path is not credible, that market participants are surprised when the actual repo rate deviates from the expected one. Forecasts under this assumption can be constructed by using what are known as unanticipated deviations of the repo rate path. The assumption used should depend on the circumstances and the motives for this choice should be stated. Normally, the repo rate path that is included in the main scenario of the report should be chosen such that it best stabilises inflation and resource utilisation when it is credible. The starting point should be that the analysis in the Monetary Policy Report/Update and in other information from the Riksbank is so complete, well-reasoned and convincing that it gives the repo rate path credibility. Forecasts for policy rates abroad should primarily be based on market expectations according to implied forward rates.