A third reason is that it is important for the Bank’s future forecasting work to understand why our forecasts sometimes are inaccurate. The low inflation rate has helped fuel the monetary policy debate in the past year. On the one hand, we have been criticised for not sticking to our normal policy rule and that monetary policy, given this rule, is not expansionary enough. On the other hand, it has been claimed that the expansion in household credit has been too fast and that the risk of a house price bubble should prompt us to raise the repo rate. One variation on the latter theme has been more general criticism that the Riksbank has its hands tied as a result of its own inflation target and that its policy is rigid. The essence of this seems to be that we have adopted an overly slavish approach in trying to meet the inflation target. So the question of how best to conduct monetary policy is not easy. As a result we always welcome a serious, challenging discussion. I intend today to try to answer the question of why inflation is so low, after which I will tie this in with recent developments and the current monetary policy situation. But before I do so, I would like to touch upon the fundamental issue of how we conduct monetary policy. A framework for monetary policy The objective of Swedish monetary policy is explicitly set out in the Sveriges Riksbank Act: it is to maintain price stability.
We have also underscored time and again that the rule only helps us part of the way. There may be reason to depart from it. The Riksbank’s clarification of monetary policy in 1999 explains when this may be the case. One reason is the occurrence of a shock that has caused inflation to deviate considerably from target. In such cases there may be a risk of undesirable fluctuations in the real economy if we were to try to bring inflation back to target within the normal time horizon. We have to be able to make allowances for such circumstances; otherwise they could have serious repercussions for the real economy. And our monetary policy framework provides scope for this. But no two situations are ever exactly the same. It is necessary to have a thorough analysis on which to base our standpoints and an explanation for our decisions. Another reason to deviate from the policy rule is if inflation is judged to be influenced by temporary effects, i.e. effects that will diminish without any monetary policy intervention. That, for example, is why we often focus our discussion on UND1X, the measure of underlying inflation that excludes the effects of indirect taxes and subsidies as well as interest rate changes. But it can also be a case of temporary supply shocks that are not expected to persist, such as the sharp rise in electricity prices at the turn of the year 2002/2003.