To put it somewhat differently, but with the essence more or less the same, the rule means that monetary policy should normally be aimed at meeting the inflation target of 2 per cent CPI inflation one to two years ahead. BIS Review 26/2004  1  The fact that we use primarily the inflation forecast one to two years ahead as a kind of intermediate goal for the real target of 2 per cent actual inflation means that temporary shocks that only have an impact on inflation in the coming year do not generally affect our rate setting. It is conceivable that drastic changes in interest rates could bring inflation back to the target faster than over one to two years. But such a policy would probably result in sharp, undesired fluctuations in both the real and financial economy. Against this backdrop it could be said that we normally deliberately tolerate the target deviations that result from temporary shocks to inflation and that arise and diminish over the next year. However, sometimes temporary effects on inflation arise that do not subside during the subsequent year. These effects then show up in the inflation forecast, measured in terms of the CPI, one to two years ahead. But if the effects are expected to disappear quite soon afterwards, there may be cause not to counter them through repo rate adjustments.
The journey has not been entirely problem-free, and the experiences we have gained on the way have prompted us to make some changes to practical aspects of policy, or perhaps rather as regards how policy is communicated to the public. We have also had to change and improve our analysis of inflation in different respects. I intend today to touch upon the problems we have encountered on our journey and how we have tried to deal with them. Important to have explicit communication So what difficulties have we encountered as regards defining the inflation target in terms of the change in the CPI? To illustrate this I need first to say a few words about the principles that underlie the Riksbank's interest rate decisions. Like other central banks that have adopted inflation targeting, the Riksbank has worked from the premise that monetary policy affects inflation with a certain lag; it is generally assumed that it takes one to two years before a rate adjustment achieves its full impact on inflation. Against this background, and as a step towards clarifying how we try to attain our target, we have formulated a simple rule for monetary policy: if the forecast of inflation one to two years ahead exceeds 2 per cent the repo rate should normally be raised, and if the forecast is below 2 per cent the repo rate should normally be lowered.