One central issue in this context is the inflation target. If a central bank “promises” low inflation, but the economic agents do not find this credible, it will not have the desired effect. It is possible to inspire confidence in the inflation target by the central bank being politically independent. What does this have to do with the zero interest rate problem and the repo rate path? What I mean is that the existence of a repo rate path in connection with cutting the repo rate to 0.25 per cent, provided credible evidence that a low interest rate over a long period of time was what was needed to attain  5  One argument in favour of the bound possibly being below zero is that there are handling costs for cash. This would then mean that one can accept a negative interest rate to refrain from cash and invest in interestbearing assets. See, for example, Meredith Beechey, and Heidi Elmér (2009), “The lower limit of the Riksbank’s repo rate”, Economic Commentaries no 11, 2009, Sveriges Riksbank. 4  BIS Review 85/2010  the Riksbank’s monetary policy objective of an inflation rate close to the target, and to stabilise resource utilisation. One could say that we put our cards on the table. 6 Figure 2 shows the relationship between market expectations according to forward rates and the Riksbank’s repo rate path in connection with the repo rate being cut to 0.25 per cent in July 2009.
BIS Review 85/2010  3  During the forecasting process, the main scenario presented at the monetary policy meeting has in practice become a scenario that is supported by a majority of the Executive Board members. If there are any reservations against the main scenario or the monetary policy decision, these are made clear at the monetary policy meeting. Thus, the monetary policy decision is preceded by a long process. As the decision now also includes the Board’s view of the future repo rate, more in-depth and long-term discussions are required than if it was merely a question of whether or not to alter the repo rate. The repo rate path has entailed a fruitful change. The role of the repo rate path during the financial crisis When we began to make repo rate forecasts a few years ago, I do not believe anyone expected a situation like the one we had when GDP fell by 5 per cent in 2009. During the financial crisis several central banks were forced to cut their policy rates to close to zero. This has entailed restrictions on future decisions, as the nominal interest rate has a lower bound. The classical argument in favour of this lower bound is that the nominal interest rate on cash is zero, and that a negative interest rate would mean that economic agents would hoard banknotes. There are many discussions in the academic world as to whether the lower bound lies at zero or slightly below.