In addition, it made our communication better aligned with our analytical framework and with theory. [Chart: Our interest rate forecast is conditional] Our forecast for the key policy rate 9 is presented in a panel together with forecasts for inflation and the output gap. The chart shows the forecasts in the most recent Monetary Policy Report, published just two weeks ago. There is substantial uncertainty associated with the projections, as illustrated by empirically based fan charts. The fan chart for the policy rate also illustrates the conditionality of the forecast: Although we control the key interest rate, the forecast for the interest rate is conditional on the outcomes for other variables, which are uncertain. [Chart: The system for monetary policy analysis and forecasting] When we decided to publish our own interest rate forecast, more transparency and documentation were required regarding our models. Our core policy model, NEMO (Norwegian Economy MOdel), is used as a starting point to derive our interest rate forecast. Over time, we have also established an apparatus for nowcasting 10 in order to steadily improve our assessment of initial conditions. In addition we collect information about the current economic situation from our regional network of business contacts. A set of models are used for cross checks and the assessment of exogenous assumptions. Our core policy model NEMO is a New Keynesian dynamic stochastic general equilibrium (DSGE) model for a small open economy. The model has many features that are similar to corresponding models in other central banks.
12 On this occasion, our new interest rate forecast just confirmed what the  12  6  Norges Bank’s forecasts of market rates are calculated as a forecast of the key policy rate plus an estimated 3-month interbank risk premium. Both are given as quarterly averages. BIS central bankers’ speeches  market had already learned and expected from our reaction pattern. In such a case, the market interest rate path works as an automatic stabiliser: If the market expects the outlook for the economy to change, and it – correctly – anticipates the central bank’s reaction to it, the appropriate tightening or loosening will be reflected in market rates even before any action is taken. The example illustrates an important point: By being transparent and by regularly and over time providing information about the revisions of the forecasts, economic agents are kept up to date with the central bank’s reaction pattern. Since the world changes, our interest rate forecast may at times come as somewhat of a surprise. And in situations where we observe that market participants are not well enough informed about our reaction pattern, we do not hesitate to surprise the market. The huge shock to the international – and hence the Norwegian – economy during the financial crisis in 2008 may serve as an example. In this case, we were able to guide the market and affect expectations when we presented a new interest rate forecast.