The difference between the red and blue yield curves shows what would happen to interest rates for various maturities if the repo rate path were to become credible. This would cause the blue yield curve to shift upwards to the red one. A three-year interest rate would thus increase by approximately 60 basis points, and a five-year interest rate would increase by closer to 90 basis points. Normally, the Riksbank’s wish and endeavour is that the repo rate path is credible, and incorporated into market expectations and market pricing. In this way, monetary policy has the largest possible impact. This time, it seems to be less desirable. If the repo rate path were to become credible, long interest rates would rise drastically, which would mean a substantial tightening of monetary policy in relation to the present situation. In my opinion, the repo rate path in the main scenario should be one that we want to immediately become  6  I have extended the repo rate path beyond the three-year horizon so that the repo rate rises steadily up to a long-term level of 4 per cent. BIS Review 158/2010  7  credible, if it is not already credible. That is, the repo rate path of the main scenario should be chosen such that is best stabilises inflation and resource utilisation when it is credible. Why such a modest krona appreciation in the main scenario? The main scenario includes a fairly modest appreciation of the krona. Why isn’t it bigger?
The grey broken curve called “Low interest rate path without initial increase” shows an interest rate path with an unchanged repo rate in October and then a gradual increase up to around 2.7 per cent at the end of the forecast period, that is, the repo rate path advocated by Karolina Ekholm and myself at the monetary policy meeting in October. Figures 9c and 9d show with the same colours the corresponding forecasts for CPIF inflation and unemployment, all conditional on policy rates abroad according to market expectations. Figures 9c and 9d clearly show that the low repo rate path without initial increase provides the best outcome, with a CPIF forecast closest to the target and with the lowest unemployment forecast. This is also illustrated with the aid of the mean squared gaps in Figure 9b, in which this repo rate path results in a point corresponding to a lower mean squared gap for both the CPIF and unemployment. The mean squared gap for the unemployment gap is calculated on the basis of an equilibrium unemployment rate of 5.5 per cent. The low repo rate path dominates, even if the equilibrium unemployment rate is assumed to be as high as 6.5 per cent. Judging from this figure, an even lower repo rate path could provide an even better outcome for CPIF inflation and unemployment.