The other point has to do with the fact that it becomes easier to produce consistent forecasts and scenarios. This is particularly important when preparing estimates and developing scenarios in a somewhat longer-term perspective than the usual two years, which can sometimes be valuable in order, for example, to show the effect on inflation of shocks that are judged to be temporary. The assumption of a constant repo rate becomes generally more unrealistic the longer the forecast horizon is extended. When the difference between the market’s view of the future repo rate and the assumption of an unchanged repo rate has been large, it has also been complicated to link assumptions about short-term interest rates to a reasonable picture of, for instance, future long-term rates, since long-term rates depend on expectations of how short-term rates will evolve. Up to now the Riksbank has chosen to highlight forecasts based on an unchanged repo rate; this has basically worked well, not least in terms of communication. Little by little, however, the Bank's monetary policy work has evolved to the extent that there are now sufficient analytical resources with which to deepen the discussion in this area. The approach used so far has also, as the Bank’s analysis has developed, felt like a bigger restriction in the internal work than before. The perceptions of how the Riksbank acts seem also to have become so well established that the communication risks of presenting forecasts with different interest rate scenarios appear smaller today than before.
The combination of low short-term rates and asset purchase programs has driven yields on long-term sovereign debt to historically low levels (Figure 2). In large parts of Europe and Japan, short- and long-term yields remain near zero, a full decade after the onset of the financial crisis. Economic developments since this unprecedented monetary stimulus provide valuable insights into the efficacy and limitations of monetary policy. On the positive side of the ledger, advanced economies have seen steady growth and significant declines in unemployment, with rates today near, or in many cases well below, those seen before the crisis (Figure 3). Bold monetary policy actions surely played an important role in averting far greater catastrophes and aided economic recovery. However, this success was achieved only after a disappointingly slow recovery and many years of economic hardship. And, despite the improvement in the real side of economies, inflation rates have persistently been below central banks’ goals (Figure 4). The fact that inflation has been running below target in most advanced countries—the United Kingdom being the most prominent outlier—suggests that this challenge is not due to factors specific to a single country. Instead, there are more systemic factors at play. Investors view these low inflation readings not as an aberration, but rather a new normal. This is evidenced by a broad-based decline in market-based measures of longer-run inflation expectations since the mid-2000s, with the UK again providing the exception (Figure 5).