As the Swedish krona is judged to be undervalued at present, we also assume that the exchange rate follows a path that represents a gradual appreciation. The technical assumption of an unchanged repo rate and the presumed path for the exchange rate are then incorporated in the main scenario for inflation. As inflation’s future course is not a straightforward matter, we also include assessments of uncertainties. The overall picture of inflation prospects amounts in practice to an estimate of probabilities. The assessments in the main scenario imply favourable economic fundamentals: a growth rate between 2.5 and 3 per cent between 1998 and 2000, low inflation and a rising government surplus. Domestic demand in the main scenario is expected to generate a relatively limited increase in inflation’s underlying rate, from 1.1 per cent at present to 1.6 per cent at the end of next year and 2 per cent in the autumn of 2000. The 12-month change in CPI inflation is expected to be somewhat below the inflation target in one to two years time but the figure at the end of the period is judged to be approximately 2 per cent. All this means that at the end of the period under review, inflation is relatively well in line with the Riksbank’s target. It should be underscored, however, that the assessment of inflation prospects is more difficult than usual on account of the financial turbulence.
This naturally reflects the international unrest but the political situation after the general election in Sweden has also left its mark on price setting, above all in the currency market. Inflation prospects and the future path of monetary policy accordingly depend on two - contrary - factors: on the one hand, the international economic trend could be weaker than we have counted on and thereby lead to lower inflation; on the other, a sustained weak exchange rate that has no counterpart in a weaker real economy could generate increased inflationary pressure. Our monetary policy conclusion is that we will go on analysing the course of events and appraise monetary policy continuously in the light of new information. Hopefully, the analysis in the Inflation Report should give an indication of our line of reasoning about the  BIS Review 80/1998  -5-  inflation outlook in Sweden and the future path of monetary policy that is as clear as possible in the global economy’s present state of uncertainty. The unsettled situation in international financial markets has meant that investors are shifting to currencies which are historically secure. As a result, other currencies, particularly those of smaller economies, have weakened. This tendency has been evident for the Swedish krona in recent weeks and very clear in the last few days. The recent path of the Swedish krona is not consistent with the development of our economy’s fundamentals.