Different countries have chosen different solutions – although most countries define their inflation target in terms of the CPI or a modified version of the CPI. We Executive Board members have said that of course the Riksbank should not exclude the possibility of changing to another measure of inflation than the CPI if there are good reasons for doing so. But when discussing such a change I believe that it is important to remember the most important reason for introducing the inflation target, namely the need for a nominal anchor. This implied at that time, and in my opinion it still indicates, that the inflation target should be defined in terms of a price index that reflects normal purchases and which Swedish households are familiar with. In any case, one important criterion for an alternative measures must be that it can really function as an anchor for inflation expectations. Are we Executive Board members "inflation nutters”? Many proposals for changes in the inflation-targeting policy that have been put forward recently relate to the balance between stabilising inflation and stabilising the real economy. Sometimes they seem to assume that the Riksbank is not allowed to, is unable to, or quite simply does not want to give consideration to production and employment when making decisions on the repo rate. Let me say this as clearly as I can: they are wrong. When we make decisions on changing the repo rate and make forecasts for it we always consider how production and employment will develop.
At the same time, we of course cannot allow inflation to drift too far from the 2 per cent target, or to wait too long before bringing inflation back on target, as there would then be a risk that the inflation target would lose credibility. So, from the Riksbank’s point of view we have said that monetary policy is normally aimed at attaining the inflation target a couple of years ahead. This is our aim when forecasting the repo rate path. So an appropriate repo rate forecast is normally that inflation is close to the target a couple of years ahead, according to our forecast, without any major fluctuations in the real economy. Monetary policy depends on the type of shock This means that it is not possible to describe our strategy by any mechanical policy rule. To determine whether, and if so, how the repo rate needs to be changed now and in the coming period, it is necessary to analyse the causes behind the deviation of inflation from the target and also how the interest rate, inflation and the real economy interact. What is the driving force in the economy? What type of shock has led to inflation deviating from the target? How has it affected production, employment and so on? And how are they likely to develop in the future? As there is a time lag before the effects of monetary policy become apparent, the forecasts are of central importance.