As there is normally great uncertainty in the inflation assessment of the main scenario, the Riksbank also produces risk scenarios; we also publish estimates of the probability distribution of different inflation outcomes. The distribution around the probable outcome is taken into consideration when decisions on the interest rate are taken. In the third place, we can make different assessments as to how monetary policy is to be conducted to strike a reasonable balance between fluctuations in growth and inflation. As I mentioned earlier, the Executive Board has agreed that we can decide not to bring inflation back to target within one to two years if CPI is affected by temporary factors or if the economy is affected by extensive disturbances. Making assessments and evaluating when - within these frameworks - there are sufficient reasons for avoiding output variations by extending the control horizon is far from self-evident, however. To maintain the credibility of monetary policy aimed at price stability, it is important therefore to justify such departures. In the fourth place - and I am now starting to sound as if it is not at all possible to conduct monetary policy with a demand for clarity - we do not know exactly the stimulation or tightening produced by a particular interest rate. This depends on our, like everybody else’s, limited knowledge of the “transmission mechanism”. It is also due to it being difficult to exactly define at what real interest rate, monetary policy has a neutral effect on demand.
When the new Executive Board of the Riksbank took office at the beginning of 1999, we found no reason to change the target formulation. To make it possible to evaluate how we carry out our task, we endeavour to be as clear as possible about the grounds on which monetary policy decisions are made. Inflation assessments and interest rate decisions are explained in the Riksbank’s inflation reports. The Riksbank has also stated a rule of conduct for what should normally lead to decisions on interest rate rises, and the justifications for departures from this rule of conduct. Finally, the published minutes of the Executive Board’s monetary policy meetings contain an account of how we voted and the reasoning underlying the decisions. Resource use is important for inflation Since the interest rate affects inflation with a time lag, monetary policy decisions are based on forward-looking assessment of inflation. Highly simplified, the conceptual framework, used by the Riksbank in the appraisals of price tendencies, can be described as follows: when there is unused capacity in the economy, price pressure is low and inflation is under the target. When demand is sufficiently high to lead to output exceeding the level that coincides with the long-term trend level of production, inflation instead tends to exceed the target. Inflation will be on target when output is at the level of the long-term trend level of production - the output gap is closed. This reasoning assumes that inflation expectations are close to the target for monetary policy.