It is not reasonable to believe that we and the market participants will always reach the same conclusions. Inflation expectations are well-anchored around the target, which is the most important indication that the market has confidence in monetary policy. Why publish our own repo rate forecast? To put it plainly: a forecast for growth and inflation requires an assumption about the interest rate. The inflation target was introduced in 1995, and it was then assumed in the forecasts that the repo rate would be unchanged during the forecast period. This had an advantage in terms of clarification; if the forecast for inflation was that it would overshoot the target (be higher than 2 per cent) a couple of years ahead, then the repo rate would be raised, and vice versa. However, an unchanged repo rate throughout the forecast period was an unrealistic assumption. The realisation came gradually that the forecasts needed to be based on a more realistic view of the future repo rate. It was decided that the Bank would use market expectations, as reflected in implied forward rates, as a base. 1 From autumn 2005 the Riksbank began working with this new assumption in its forecasts. Once this “second step” had been introduced, a further question arose. Although a future repo rate being in line with forward rates was a more realistic assumption than a constant repo rate, situations could arise where the forward rate path did not agree with what the Riksbank considered to be the “best” forecast for the repo rate.
The Riksbank’s forecast indicated that the repo rate would remain at this low level until the second half of 2010. The forward rates prior to the publication of the repo rate path indicated that the repo rate would not be cut to 0.25 per cent and that increases in the repo rate would begin as early as the end of 2009. Surveys carried out by Prospera indicated that expectations were in line with the forward rates. Although the forward rates were adjusted down after the publication of the repo rate path, the pricing still showed that expectations were set at a first repo rate increase at the end of 2009. Where the Riksbank’s forecast indicated a first repo rate increase, the forward rate was already up at around 1.5 per cent. This large deviation caused considerable discussion, partly concerning the current situation and monetary policy, and partly more general as to whether it is a problem if market expectations deviate from the Riksbank’s forecast. As shown in Figure 2, however, market expectations were lower than the Riksbank’s repo rate forecast at the end of the forecast period. Seen across the entire forecast period, therefore, the average deviation is not so great. With hindsight, we can also note that in summer 2009 market expectations deviated considerably from the repo rate outcome we can see so far. Figure 2 The repo rate path and market expectations in July 2009 Per cent  Note. Market expectations are based on forward rates.