5 I will not go in to it here, but merely note that a majority of us on the Executive Board has regarded the current repo rate as in practice being the lower bound. This zero interest rate problem received much attention in the academic world in connection with the Japanese central bank cutting its policy rate to zero as a result of the economic stagnation in the 1990s. One of the possible solutions if a central bank has cut its policy rate to its lower bound, and wants to cut it further, is to promise a policy rate around zero for a long time to come. Over time this would have a similar effect to cutting the interest rate to below zero and then raising it to above zero. The repo rate path facilitated communication During the financial crisis, lessons from this research became surprisingly topical for a number of countries in addition to Japan. The repo rate path fulfilled a central role here, as it enabled the Riksbank to make clear its intentions for monetary policy during an uncertain situation. When the Riksbank cut the repo rate to 0.25 per cent in July last year, the repo rate path signalled a low repo rate for a long period ahead. I believe this gave us an advantage over many other central banks, who tried to use purely verbal methods to signal that their policy rates would be low for a long time. Credibility plays an important role in monetary policy.
“Before” are the closing rates on the day before the repo rate path was published and “After” are the closing rates on the day it was published. Prospera’s survey covers money market participants. Sources: Reuters EcoWin, TNS SIFO Prospera and the Riksbank. A recurring phenomenon during the three years with our own repo rate path has been that market expectations of the repo rate have from time to time deviated from the Riksbank’s repo rate forecast. Allow me to comment further on this. 6  In addition to the repo rate cut of 0.25 per cent, the Riksbank has granted loans at a fixed interest rate for the purpose of bringing down actual interest rates paid by companies and households. BIS Review 85/2010  5  Market expectations and the repo rate path As I mentioned earlier, one important purpose of publishing a repo rate path is to influence expectations among the participants in the economy. The established view at present is that monetary policy has its main impact by influencing expectations of future interest rates. A natural question here is if the Riksbank’s repo rate path has differed from other agents’ expectations of the repo rate, and how large the deviations have been. What role do the differences between market expectations and the Riksbank’s forecasts play? How large are the deviations… As we have seen, the Riksbank, the market and other economic agents can have different views on how the repo rate will develop. Sometimes the differences are small, and sometimes they are large.