The two-year horizon should be interpreted as a restriction as to how much consideration can normally be given to real economic developments. It is a restriction that we have imposed upon ourselves – like the specified inflation target – to create credibility for the price stability target. Similar reasoning lies behind the set tolerance interval we have chosen around the target. While the tolerance interval provides an interval within which inflation can normally be expected to fluctuate as a result of unexpected shocks and insufficient knowledge of exactly how monetary policy affects the economy, it provides a limit as to the size of the deviations that can be tolerated. However, let me point out that there can be certain situations where the shocks to the economy are so great that there is reason to allow even longer than two years to bring inflation back on target. If our assessment was that such a situation had arisen, we would make this clear when publishing our monetary policy decisions. One condition is that we do not find ourselves in a situation where we would risk undermining confidence in the inflation target or in monetary policy. These thoughts on how to take into account developments in the real economy are of course not unique to the Riksbank. Although the guidelines for inflation-targeting monetary policy vary slightly from one country to another, all central banks with inflation targets conduct monetary policy that to some extent takes into account the real economy. This is usually termed flexible inflation-targeting.
Given this way of thinking, our Inflation Reports contain a special section where we discuss alternative scenarios for inflation and the real economy and the probability that these will materialise. It is the forecast of inflation and the real economy taking into account the risks of alternative scenarios that forms the basis of our monetary policy decisions. Of course, it is not appropriate for a risk analysis to take into account all imaginable risks; not even all those that would have dramatic consequences if they were to materialise. For instance, it is not reasonable, in my opinion, to allow monetary policy decisions to be governed by the risk of global imbalances, as we are unable to affect this development through our own monetary policy. 3 On the other hand, I consider that it is important to always take into account risks that arise from the monetary policy conducted, even if it is sometimes difficult to quantify these risks and calculate their consequences. One problem faced by many central banks with inflation targets, and which relates to this, is the risk of unfavourable developments in property prices and household indebtedness as a result of a long period of expansionary monetary policy. Sweden is no exception here. Both cyclical and structural factors justify the growth rate in household debts and property prices being high over a period of time in Sweden and there is thus reason to take this into account in the normal analysis and forecasting work.