To understand the most recent interest rate decisions, it is important to remember that we do not adjust the repo rate to affect the present inflation rate, but to influence inflation a couple of years ahead. It takes time for monetary policy to achieve its full impact on the economy. Monetary policy must therefore be based on expectations of the future, i.e. we are dependent on forecasts. It is therefore necessary that we occasionally ”lean against the wind”, that is, that we raise the repo rate despite the current inflation rate being below target level or that we lower the repo rate despite inflation being above the target level. If we were only to look at the present inflation rate, there is a risk that we would be forced to make more drastic adjustments further ahead and this type of roller-coaster interest policy would benefit no one. How do we assess future inflation prospects? The economic outlook is currently bright, both in Sweden and abroad. International growth has been both high and stable in recent years (diagram 1). Strong growth in the United States and parts of Asia has been a driving force for global economic activity. Increased participation in global trade by, among others, several Asian countries has contributed to this upswing and to stiffer international competition. So far, the increase in global  BIS Review 12/2006  1  demand has not had a visible impact on consumer prices.
The risk of inflation can only arise if growth in the monetary base coincides with an increase in the broader monetary aggregates through higher customer deposits in banks. For the broader monetary aggregates to  6  See for example speech by Federal Reserve Chairman Ben Bernanke: “Monetary Policy since the Onset of the Crisis”, the Federal Reserve Bank of Kansas City Economic symposium, Jackson Hole, Wyoming, 31 August 2012. See also speech by Spencer Dale, Chief Economist at the Bank of England: “Limits of monetary policy”, http://www.bankofengland.co.uk/publications/Pages/speeches/2012/597.aspx  BIS central bankers’ speeches  3  increase, banks must increase lending or purchase securities from enterprises outside the banking sector. Since the crisis in 2008, the monetary base in Europe and the US has grown considerably more rapidly than the broader monetary aggregates. The risk of high inflation in such a situation should be viewed in the context of central bank exit strategies. In the future, central banks will want to reverse the extraordinary measures that have resulted in substantial growth in the monetary base. This will normally be done when the crisis is over and the economy is recovering. Third, the large sums of money involved may also affect exchange rates. Even if central banks do not intervene in exchange markets directly, the measures may in the short term reduce the value of the currency issued by a central bank. This will, in isolation, strengthen exchange rates in countries that were initially less severely hit by the crisis.