We also saw that commodity prices had risen, as had food prices (Figure 6). Business tendency data from the National Institute of Economic Research also indicated that food prices would continue to rise. Inflation expectations, which normally fluctuate fairly substantially, had also shown a weak trend increase since summer 2005 and were at around 2.5 per cent for households in August, according to the National Institute of Economic Research’s survey (Figure 7). House prices had also continued to rise over the summer, while household borrowing had continued to increase at roughly the same rate as during the first quarter. BIS Review 111/2007  1  To summarise, there were in my view strong domestic reasons for raising the repo rate to 3.75 per cent in September. This could in itself also have justified a slightly higher forecast for the repo rate. But there was a counteracting effect from developments in the United States and the unrest on the financial markets. My conclusion was therefore that the repo rate forecast from June provided a fairly good picture of the most likely path for the repo rate over the coming years. If it were the case that the US economy suffered a deep recession with severe contagion effects, the Riksbank would have reason to reconsider its views. Advantages of an own interest rate forecast This leads me on to our experiences so far of the Riksbank’s publishing its own forecast for the repo rate.
So despite the market analysts’ own interest rate expectations being in line with the Riksbank’s published interest rate path for the coming six months and higher further ahead, they were surprised by the Riksbank’s upward revision of the interest rate path. One might ask why market agents’ expectations of the Riksbank’s interest rate path differed from their own forecasts for the repo rate. One interpretation is that they believed they had weighed together information on inflationary pressures in the economy in a different way than the Riksbank. This is nothing strange in itself. Assessing economic developments is not an exact science and different forecasters may very well draw different conclusions regarding the underlying inflationary pressure in the economy. But what surprises me, if this is the  4  BIS Review 111/2007  correct interpretation, is that the market nevertheless reacted so strongly to the assessment we made in June. Another interpretation might be that some analysts thought the Riksbank’s assessment of inflation prospects and interest rate development did not differ significantly from their own assessments, but that the Riksbank did not want to revise the interest rate forecast made in February by that much, for reasons of prestige. I do not know whether this could have been part of the explanation, but I believe and hope that it was not. We Executive Board members have always been careful to point out that the interest rate path we publish is a forecast, and like other forecasts is reconsidered each time we make a decision.