Inflation expectations are a decisive factor for credibility My view is that the decisive factor for a central bank with an inflation target is inflation expectations. Expectations should be anchored around the inflation target in the long run. I say “long run”, as inflation expectations in the short term vary considerably in accordance with actual inflation. Figure 4 shows inflation expectations 1, 2 and 5 years ahead according to Prospera’s survey for money market participants. We can see that inflation expectations 5 years ahead have been around 2 per cent during the past 10 years. I interpret this to mean that there is still unshaken confidence in the inflation target. Figure 4 Money market participants’ inflation expectations according to Prospera Per cent  Note. Monthly data from September 2009. Quarterly data prior to this. Source: TNS SIFO Prospera. BIS Review 85/2010  7  I have so far discussed our experiences of publishing repo rate paths. Let me now go on to discuss the most recent repo rate path in the Monetary Policy Update published in April this year. Some aspects of the current repo rate path Figure 5 shows the repo rate path from the Monetary Policy Update in April together with market expectations of the repo rate. For the coming year both forward rates and survey expectations were very close to the Riksbank’s forecast. Expectations as expressed in the surveys agree fairly well with the Riksbank’s forecast, even in the longer run.
Figure 3 shows two summarising measures for the deviations between market expectations according to forward rates and the Riksbank’s repo rate forecast at the time of all 18 publications. 7 We can see that the deviations have become larger since the financial crisis erupted, which is natural as uncertainty increases. Looking at the whole period since 2007, however, there does not appear to be any systematic deviation in any direction (the average deviation is approximately zero for the whole period). It is important to point this out. One question that may nevertheless arise is why market expectations deviate from the Riksbank’s forecast. Figure 3 Deviations during the forecasting horizon between the repo rate path and market expectations according to forward rates Percentage points  Note. For a description of the calculations, see footnote 7. Sources: Reuters EcoWin and the Riksbank. 7  The measures show the following: at the time of a given forecast the difference between market expectations and the Riksbank’s forecast for the repo rate 1 to 12 quarters ahead are measured. This thus gives 12 different deviations for each time of publication. One measure gives the average of all 12 deviations. The other measure shows a “standard deviation”, where the sign of the deviation is unimportant. 6  BIS Review 85/2010  …and what are they due to? To begin with, I would like to make the reservation that market expectations cannot be observed, they can only be estimated.