New surprise in June – but in the opposite direction Prior to the meeting in June, we received the National Accounts figures for the first quarter. These showed that productivity had developed much more weakly at the beginning of the year than we had anticipated. The labour supply was also still lagging behind the assessment we had made, which indicated that the labour market had tightened. This of course changed our assessment of how quickly cost pressures could rise and we revised up our forecast for the repo rate by an average of around one half a percentage point in relation to the February one. BIS Review 112/2007  3  The differences between our forecast and market expectations were small over the coming year, but our interest rate forecast was still lower than market expectations in the longer term. Despite this, implied forward rates rose over the entire forecast period by approximately 0.15 percentage points when we published our forecast. Market reactions were thus actually stronger than in February. But why were market reactions so strong in June? Of course, we have no interest in creating major fluctuations in the financial markets through our decisions and our communication. It is therefore important to us to understand why the market reacted the way it did. This is a natural part of the work on making communication as clear as possible. One reason for the rise in interest rates in June was that international interest rates rose on the day we published our interest rate decision.
The reactions and comments regarding a couple of our speeches in the early summer indicated that some analysts perceived them in a way that was not intended. The speeches were interpreted as though they pointed forwards although we had provided information on changes in our way of signalling and said that we did not intend to make any forward-looking comments that would provide clues regarding the next interest rate decision. Some concluding reflections on communication The fact that our message had not entirely come across is partly due to some market agents not understanding what we actually had communicated. But it is also partly because we have not been sufficiently clear in our communication. I believe this is quite simply a learning process. We at the Riksbank and those we want to communicate with – the general public, journalists and market analysts – must learn to understand one another. In this respect we will try to improve. One step in this direction is the decision to name the Executive Board members in the minutes of the meetings. In this way it is possible to follow how each member has reasoned. A further step that we recently decided on is to also publish forecasts for the repo rate and a small number of key variables at the monetary policy meetings held between the publication of the Monetary Policy Reports. If, for example, we had published a new interest rate path in May, I believe that the market would have been less surprised in June.