However, expectations according to forward rates were much lower than the Riksbank’s repo rate path in the longer run. The total deviation between the repo rate path and forward rates can also be seen on the far right in Figure 3. Figure 5 The repo rate path and market expectations in April 2010 Per cent  Note. Market expectations are based on forward rates. “Before” are the closing rates on the day before the repo rate path was published. “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. The real repo rate path How expansionary is the monetary policy that follows on from the Riksbank’s repo rate path? One way to gain an idea of this is to look at the development of the real interest rate. The real interest rate is the most important for the development of the real economy, as it is the interest rate on which consumption and investment decisions are based. It is defined as the nominal interest rate minus expected inflation. The Riksbank also publishes forecasts for the real repo rate in its Monetary Policy Reports. 8  BIS Review 85/2010  Figure 6 shows the Riksbank’s forecast from the April Monetary Policy Update together with different measures of market participants’ expected real repo rate. 8 Let us begin by looking at the Riksbank’s forecast for the real repo rate.
The repo rate path also has significance for developments in long-term rates, although other factors than expected repo rates, such as international events, may have significance in the development of long-term interest rates. Figure 1 Interest rates at different maturities in Sweden Per cent  Note. The interest rates refer to treasury bills and government bonds. Sources: Reuters EcoWin and the Riksbank. Greater openness and clarity from the Riksbank creates better conditions to govern expectations in the corporate and household sectors. The publication of a repo rate path can be regarded as a contribution to this. Any forecast for the Swedish economy made by any reasonable type of model also generates a forecast for the repo rate. So why should one  2  See, for example, Michael Woodford (2005): “Central Bank Communication and Policy Effectiveness”, paper presented at the conference Inflation Targeting: Implementation, Communication and Effectiveness, Sveriges Riksbank. 2  BIS Review 85/2010  then “hide the most central forecasting variable”, as my Executive Board colleague Lars Svensson put it. 3 A particular advantage in publishing one’s own repo rate path is the opportunity to describe alternative scenarios for future economic developments and the consequences they would have for monetary policy. This has made it easier for market participants and households to judge how we Executive Board members will act with regard to the repo rate depending on the different alternative paths for growth and inflation. The Monetary Policy Report shows alternative scenarios, not merely for economic developments, but also for the repo rate.