Such influences can be changes in indirect taxes and subsidies or the price of oil. To the extent that such changes only have an initial direct effect on the price level but are not deemed to influence the future rate of inflation, they should not precipitate interest rate adjustments. A special case of the temporary effects is what happens when the Riksbank changes its policy and raises or lowers the instrumental rates. This affects the interest costs of housing, thereby influencing the CPI. Hence, interest rate changes can make it more difficult to reach the price stability objective in the short run. The CPI has varied significantly more than the various measures of underlying inflation that the Riksbank produces (Figure 5). One example is 1996, when interest rates were reduced rapidly. The CPI then fell much more than the underlying inflation, which was due to a reduction of the interest costs for housing. In this way, annual inflation ended up somewhat below the one per cent lower limit of the tolerance interval. At the same time, all indicators of underlying inflation show that it has edged downwards and has recently kept relatively stable in the interval of 1-1.5 per cent. The problem of temporary influences can be managed in different ways: 1. One possibility is to clearly specify in advance which deviations from the CPI are acceptable. This is the method used in New Zealand. It could lead to greater transparency.
When inflation expectations are taken into account, the outcome of an inflationary policy is normally worse rather than better economic development . BIS Review 56/1997  -2-  The best contribution that monetary policy can make to good growth in the long term is to see to it that an environment with stable prices is created and maintained. Within these bounds a central bank can support economic development in general. In the short term the possibility may exist to influence the economy’s activity level with monetary policy instruments. For that to be possible, monetary policy objectives would need to be completely credible. A central bank should have as its primary objective price stability. Given the time lags that exist in monetary policy, it takes from one to two years before the effects of an interest rate change make themselves fully felt on inflation. Therefore policy must be be guided by the forecasted inflation, not by the inflation existing in the present situation. If an inflation forecast for the coming two years shows that there is a risk that the inflation target may be missed, the instrumental rate should be changed so that inflation is driven back in line with the target. If inflation is expected to be lower than the target, there is room in practice for monetary policy to take the activity level into consideration. The Riksbank can then lower the interest rate and in such a manner stimulate production and employment temporarily.