In many parts of the world, and not least in the euro area, low inflation over a long period of time has come as a surprise to central banks and others. The European Central Bank (ECB) has expressed concern over falling inflation expectations and recently cut its policy rate to 0.05 per cent, at the same time as declaring that this is the lowest possible policy rate for them. Moreover, they have announced several measures aimed at stimulating lending to households and companies. But it is still uncertain exactly what the measures will be and how extensive they will be. Moreover, there is little or no previous experience of these interest rate levels and measures in the euro area. It is therefore difficult to assess what effects the ECB’s measures will have on GDP and inflation in the euro area and thus, ultimately, what they will mean for inflationary pressures here in Sweden. One complicating factor is that the central banks in the United Kingdom and the United States appear to be taking a different direction with their monetary policy than the ECB. Their monetary policies are diverging. One reason why we are interested in expectations of policy rates and supplementary measures in other countries is that they influence interest in assets denominated in Swedish krona and therefore ultimately the development of the krona exchange rate.
One often sees forecasts as mean forecasts. This means in principle that the risk that the economy will develop less well is as great as the chance that it will develop better. A mean forecast for GDP growth abroad, for instance, balances everything that could give rise to lower growth against everything that could give rise to higher growth. Another way of expressing the same thing is that the forecast is a form of middle way of all the different roads the economy could take in the coming period. This way of working with forecasts means that one acts as though one has succeeded in quantifying the possibilities and effects of all of the different potential courses of events. A year or so ago there were frequent discussions of the risk of a split or disintegration of the euro system – what was the probability that this would happen and what effects would it have for Sweden? Today there may be reason to ask these questions with regard to an escalation of the Ukraine conflict or to a substantial fall in housing prices in Sweden. If one considers these difficulties in quantifying various possible sequences of events and probabilities that they will occur, it may not be as simple a matter to make decisions on monetary policy and make forecasts for future interest rates as it is sometimes made out to be.