This means  BIS Review 44/2006  3  that we do not set interest rates merely to ensure inflation is on target as quickly as possible in all situations. It is very important to emphasise that the possibility to formulate monetary policy based not only on inflation prospects but also on how production and employment will develop has come about because the inflation target is currently firmly anchored in the economy. Everyone knows that we will adapt our monetary policy to attain the inflation target. During the years when the inflation target was new, confidence in the target was too shaky for the Riksbank to dare to give consideration to anything other than attaining the inflation target. However, flexible application of inflation targeting is nothing new if one looks at the monetary policy we have conducted in recent years, once confidence in our inflation target had been established. In practice, as I said, we do not aim to bring inflation back on target as quickly as possible in every situation. The Riksbank follows the principle of normally aiming to bring inflation back on target within two years after a deviation has occurred. It is primarily in situations where inflation goes in one direction and the real economy, i.e. growth, employment, etc. goes in the opposite direction that there may be reason to bring inflation back on target at a more gradual rate. Economists usually describe these situations as the economy suffering a supply shock.
At this meeting we will make a collective assessment of events since the previous forecasts were made. The monetary policy strategy Many may wonder why we increase the interest rate despite the fact that inflation is currently slightly below target and there is still spare capacity in the labour market. What must be remembered in order to understand why monetary policy needs to be brought gradually onto a less expansionary path is that it takes time for the economy to adjust to changes in the repo rate. This means, for instance, that we have not yet seen the full effect of the expansionary monetary policy we have conducted in recent years. It also means that interest rate decisions must be based on an assessment of how the economy will look a few years from now. Let me describe how we usually reason when making interest rate decisions. This is also something described in greater detail in the document on monetary policy that we published last week. The objective of monetary policy is to maintain price stability. This was established in the changes to the Sveriges Riksbank Act, which came into force in 1999. The Riksbank has specified this in the form of an inflation target, whereby the rate of change in the CPI should be 2 per cent with a tolerance interval of +/- 1 percentage point. Stable prices are thus the objective of monetary policy in Sweden, as in all other countries in the industrialised world.