This would push down real interest rates and thereby increase the probability of the lower bound not creating too many problems. But for this to work requires a lot from the communication of the central bank as well as from economic agents’ ability to take in and comprehend the temporary change in the formulation of the target. Such a change could even be counterproductive in that it would become more difficult rather than easier to understand what monetary policy involves. Raising the inflation target would of course also entail problems. However, my assessment is that it is easier to affect inflation expectations by stating a clear figure to aim at. There are a number of earlier examples that this has been possible in practice. Admittedly, this has usually concerned bringing down inflation expectations, but that is no simple task either. Not least in the case of Sweden, there were strong headwinds and considerable doubts that we would succeed. My most important message Let me conclude by briefly summarising my most important messages. In the short term, within the current framework, the Riksbank has a number of tools to counteract the next economic downturn. But the low neutral interest rate, combined with need to conduct a very expansionary policy in recent years, may create certain problems, depending on how soon the downturn comes and how deep it is.
The Central Bank expects to direct economic activities and outcomes within its control to meet the Reserve money and Broad money targets. Such activities would include changes to the policy interest rates if considered necessary, conduct of open market operations, moral suasion, public communications and other available actions. Regular reviews of the general policy stance will also be made and intensive public awareness campaigns would be used to manage inflation expectations. In response to our policy measures and actions, we believe that both headline inflation and core inflation would moderate. It is also our belief that inflation will respond over the months in the manner as set out in the charts that follow, but nevertheless we shall be watching developments with very keen interest. Figure 6:  BIS Review8/2007  9  Figure 7: Forecast of Core Inflation 2007-2008 30 25 20 15 10 5  Lower Bound  Oct.08  Jul.08  Apr.08  Jan.08  Oct.07  Jul.07  Apr.07  Jan.07  Oct.06  Jul.06  Jan.06  Apr.06  0  Upper Bound  The Monetary Programme for 2008 and beyond will be based on the high growth path targeted by the government in the medium term, and containing money supply to maintain inflation at a low level. In this context, inflation will be targeted to gradually decrease to a level of 4 per cent within a 10 year time period. Such a target would be in line with the Government’s 10 year plan.