However, it was left to the Riksbank to determine the practical application of this objective. Our choice was to specify a quantitative target for the inflation rate: The annual increase in the consumer price index, CPI, should be two per cent with a tolerated deviation of +/- one percentage point. The purpose of a tolerated deviation is to make it clear both that inflation will deviate from the two per cent level from time to time and that the Riksbank's aim is to limit such deviations. The target is symmetrical, which means that it is as undesirable to have an inflation rate below the target level as above it. Many other countries also conduct monetary policy where they have formulated a price stability target in one way or another. The euro countries have chosen to maintain inflation at a level close to, but below, two per cent, in other words, a non-symmetrical target. The United States has taken a different view and chosen a vaguer wording for its target, with no figures expressed, as well as taking greater account of general economic trends. In New Zealand they have a target for inflation expressed in terms of an interval (1-3 per cent) but no exact figure. However, we have seen two clear advantages of having a clearly expressed target to aim for; firstly it provides a good foundation for inflation expectations and secondly it makes it easier to assess the policy conducted.
It is not possible to see the road ahead clearly and nor is it possible to know exactly what will happen if one puts one’s foot down on the accelerator pedal – only that the effect will come after a fairly long period of time. Why haven’t we cut the interest rate? Let me now return to the present situation and the question of whether it is reasonable to lower the interest rate in order to rapidly bring the present low inflation rate back in line with the target. The Executive Board’s reasoning at its most recent monetary policy meetings has been roughly as follows. Firstly, as I mentioned at the beginning, the Swedish economy has developed at an increasingly strong rate in recent years, and our analyses during the winter and spring have come to an assessment that this will continue. We have thus seen a rise in inflationary pressure at the end of the forecast horizon. If our assessment during this period had been that demand was declining, I believe the situation would have been different. Secondly, the present low inflation rate can be largely explained by what is known as positive supply shocks, such as increased competition, lower import prices and surprisingly rapid productivity growth. These factors benefit economic developments. To attempt to push up prices for domestic goods and services to counteract a decline in prices for imported goods is not necessarily a wise choice. Thirdly, monetary policy’s impact comes through influencing demand, primarily corporate investment and household consumption.