However, the timing of the rise has been repeatedly postponed in our forecasts and inflation has instead fallen. I will provide some perspective on why this has happened and discuss various factors that might explain this development. Low inflation in Sweden early on, but now also a global phenomenon Sweden is not the only country where inflation is currently low. Around half of all the OECD countries have had an inflation rate that has on average been below 2 per cent during the past two years. The trend also appears to be strengthening. During last year, inflation was  1  The CPIF is the consumer price index (CPI) with a fixed interest rate and aims to eliminate the direct effect of changes in the repo rate from the CPI. BIS central bankers’ speeches  1  below 2 per cent for around two out of three OECD countries. Of course, not all of these countries have an inflation target that is 2 per cent and in the countries which have an inflation target, this may be formulated in different ways. It is nevertheless clear that many central banks, in addition to the Riksbank, are currently undershooting their targets. However, inflation fell several years earlier in Sweden than in other countries, and Sweden is one of the OECD countries that has had the lowest inflation in recent years (see Figure 1). This is despite the fact that growth has been higher and the employment rate has not fallen as much as in many other countries.
The assumption underlying both reports was that the Central Bank’s key objective would continue to be price stability, as is mandated by law, and that the exchange rate of the króna would remain flexible, although it would not need to be entirely free-floating. I will not explain the grounds for these assumptions here, as they have been discussed widely, except to point out that it is unrealistic to entrust monetary policy with objectives other than those it has the chance to fulfil using the available instruments, and that adopting a fixed exchange rate would eliminate the advantages of an independent currency and independent monetary policy without eliminating the disadvantages. Therefore, policy formation lies in finding a framework that can work under the above-described conditions. There were a number of drawbacks to Iceland’s pre-crisis monetary policy framework. A major flaw was the lack of an adequate response to the excessive capital inflows that contributed to credit and asset price bubbles and domestic residents’ significant foreign exchange risk, which was to a large extent unhedged. Furthermore, monetary and fiscal policy were not well enough aligned, and the same can be said of other Government decisions that affected demand. The burden on monetary policy was therefore greater than it would have been otherwise, which further stimulated capital inflows. This, together with strong demand, pushed the real exchange rate higher than it would have been otherwise and exacerbated macroeconomic imbalances, as could be seen most clearly in a sizeable current account deficit.