For the record, I would like to point out here that the forecast assumption that the repo rate will follow implied forward rates does not of course entail any commitment from the Riksbank that this will be the case. We have no unique information about the future. We cannot in advance commit monetary policy to a particular sequence of future interest rate changes, as future economic developments are uncertain. The stand we take regarding the development of the repo rate at our monetary policy meetings is based on the information available at the time the decision is made. Our considerations can and should change if the economy develops in a manner different to that we had expected. 2  This is further described in the box entitled, ”Changes in the Riksbank’s forecasting methods”, Inflation Report 2005:1, in Irma Rosenberg’s speech ”The Riksbank and monetary policy” at Danske Bank, 29 September 2005 and in Lars Heikensten’s speech, ”Thoughts on how to develop the Riksbank’s monetary policy work”, at the Swedish Economics Association on 22 February 2005. BIS Review 84/2006  3  Managing risks in monetary policy decisions As monetary policy must be based on uncertain forecasts of the future, there is a need to manage the risk that the economy will develop in a way different to what was expected by the central bank. The former Federal Reserve Governor Alan Greenspan called this the risk management approach to policy.
One reason was that the assumption of a constant repo rate often resulted in our forecasts for inflation differing from those of other forecasters; being higher when inflation was rising and lower when inflation was declining. This caused confusion in the discussions on monetary policy. Since October last year, our forecasts are instead based on the technical assumption that the repo rate will develop in line with market expectations regarding the future repo rate, as expressed in the implied forward rates. This has made it easier to compare ourselves with other inflation forecasters and also to assess our monetary policy. 2 The new interest rate assumption we now apply means that we can no longer use our old policy rule. If the forecast with a constant repo rate was close to two per cent, the repo rate would be held unchanged according to the old policy rule. If the forecast according to the new outlook shows inflation close to two per cent, the repo rate will normally develop in the way reflected by market expectations. This could mean that the repo rate, given the underlying inflation forecast, should be raised or lowered in a number of stages over the coming two-year period. The new outlook thus means that the monetary policy discussion is based on an interest rate path throughout the entire forecast period, while the old policy rule only took into account what should be done at the time the decision was made.