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.
During the years the interest rate has gradually been cut, expectations according to implied forward rates have substantially overestimated the level of the repo rate. After the interest rate raises began one and a half years ago, there has rather been a tendency for the repo rate path to be slightly underestimated. As the economy is constantly exposed to unexpected shocks, it is not at all strange that forecasters revise their assessments. This applies to the major banks, the National Institute of Economic Research, the Ministry of Finance and also to us at the Riksbank and our interest rate forecasts. The major uncertainty means that we forecasters should be very cautious when making statements about the future, but this should not restrain us from saying how we think the future will look. Secondly, it is difficult to determine what will be a normal level for the interest rate a couple of years ahead, that is, the interest rate that prevails in a normal phase of the business cycle. As we can see in the diagram, the paths for forward rates have flattened out and the view of what is a normal rate has gradually been revised downwards over time (Figure 9). The Riksbank has stated that a normal level for the repo rate is probably somewhere in the interval 3.5 to 5 per cent. But experiences show that the repo rate can lie outside of this rather broad range for fairly long periods of time.