In August, to operate within a more symmetric interest rate corridor, we lowered the overnight lending rate from 12 to 11.25 percent, and the rate on borrowing facilities for primary dealers via repo transactions from 11.5 to 10.75 percent (Chart 3). In this period, we provided the CBRT funding primarily from one-week repo auctions (Chart 4). Thus, the average funding rate came close to the one-week repo rate. Yet, taking into account the geopolitical tensions and the financial market volatility, we have fortified our tight monetary stance with a tight liquidity policy since September. Accordingly, the BIST overnight repo rates, that neared the one-week repo auction rate in July and August, has lately followed a course close to the upper end of the interest rate corridor. While we had measured rate cuts, we have maintained a tight monetary policy stance by keeping the yield curve nearly flat in this quarter as well. The spread between 5-year market rates and the BIST Interbank Overnight Repo rates has been at negative levels as of October (Chart 5). In addition, as we have tightened our liquidity policy recently, short-term rates have risen substantially. Thus, we are able to keep the yield curve on a nearly flat course. On the other hand, the spread between long and short-term rates continues to hover below its historical levels (Chart 6).
One advantage is that monetary policy can be more easily evaluated. This is particularly important given the Riksbank’s independent position and the requirements made of us from a democratic perspective. A second advantage is that it becomes easier to explain monetary policy and it then has the prerequisites to become more efficient. This is because monetary policy largely acts through the expectations of future interest rates which it gives rise to, rather than through the current repo rate. Good explanations give an increased understanding and thereby a better opportunity for us to steer expectations. Let me explain this further. Easier to evaluate and compare Firstly to the question of evaluating our forecasts and comparing them with those made by others. Are our forecasts for inflation and the real economy accurate? How do our forecasts differ from those of other analysts? While our forecasts were based on the assumption of an unchanged repo rate (up to the end of June 2005) it was in principle impossible to answer such questions. The purpose of the forecasts then was to analyse how economic developments and inflation would look if we did not change the repo rate. It was a simple way of explaining whether or not the repo rate needed to be changed. But at the same time it meant that the forecasts could not be expected to be particularly accurate. The assumption of an unchanged repo rate was in most cases unrealistic and also made it difficult to produce consistent forecasts.