Although monetary policy is aimed at an inflation target, developments in the real economy and the labour market have considerable significance for the shaping of monetary policy. For one thing, total demand is one of the most important determining factors behind the inflation rate, and for another thing, taking the real economy into account can in certain cases mean that exceptions are made to the 1 fundamental monetary policy rule. This applies in particular in the case of supply shocks: Firstly, inflation can be allowed to be higher or lower one to two years ahead, when due to factors that are not considered to have a lasting effect on inflation, and secondly, the real economic costs of a rapid return to the target level are considered to be excessively high. For example, we had particular reason to observe certain temporary changes at the time of our most recent repo rate decision. The Riksbank believes that energy prices will fall back from their present high levels without the rise spreading to other prices. Another circumstance that affected our forecast was the crisis in Iraq, which has now become a war. The geopolitical situation overshadows the more normal inflationary risks that we usually observe. I shall return in a moment to the economic situation and give you my views of developments. Potential growth affects the Riksbank’s assessment When the Riksbank makes its assessment of inflation in the coming one to two years, we look first and foremost at resource utilisation in the economy.
Forward guidance on the path is today less important than commitment on our end objective First, in the current normalization phase, there is much less need and space for detailed forward guidance: we are no longer at the effective lower bound and  Page 5 sur 8 are coming back to our more normal reaction function—all the more so in the current uncertain environment. Accordingly, in our ECB July statement President Christine Lagarde emphasized optionality dependent on economic data, and taking decisions on a meeting-by-meeting basis. More importantly still, we strongly reiterated our commitment to our end objective of bringing inflation back to 2% in the medium-term, i.e. 2024 in our present forecasts. The more open we are about the path, the more committed we must be about the destination of the journey. Don’t get me wrong: market expectations of future policy rates remain a key driver of long-term interest rates, which are what matters most for investment and spending decisions. But forward-guidance—at least in the form of a commitment to an unconditional and/or prolonged path for the policy rate—is today an unadvisable way of steering market expectations. If you go to the hospital, it is certainly unpleasant not knowing how long you will stay there. But you certainly do not want a doctor who decides to keep you 7 days regardless of how your health evolves. Without question, you would rather have a firm commitment that he will cure you of your ailment! II.B.