It is exactly by daring to move out into unfamiliar waters, with historically low interest rates right down to a few basis points, and with large unconventional measures, that the world’s central banks, including the Riksbank, have succeeded in preventing the major crisis from becoming the Great Depression mark two. It has also been claimed that the discussion on the lowest level of the repo rate was resolved at the monetary policy meeting in July 2009 and that there is no reason for a reassessment. In July, the majority of the Executive Board stated in a press release and in the Monetary Policy Report that “the Riksbank’s assessment is that, after cutting the repo rate to 0.25 per cent, it will have reached its lowest level in practice”. Firstly, as I expressed at the meeting in July, in my opinion, this statement was a mistake. It goes against the commonly accepted principle that the repo rate path is “a forecast, not a promise”. In practice, the statement is a promise not to lower the repo rate further. Furthermore, the statement implies that the repo rate path cannot normally be a mean forecast, as all risk is upside risk and the mean is then higher than the repo rate path.
In the absence of more detailed information on the effect that may be dominant, it does not seem unreasonable to assume that the effects of a reduction of the repo rate path will be of a normal scale. These figures and the estimated effects of a repo rate reduction are not the final word. Of course the future will bring further developments of Ramses and other models, more empirical estimates and new experience, which will lead to the revision of these figures. However, I would claim that these figures are the latest and best word on the basis of the information and knowledge currently available, and therefore provide the best basis for a decision right now. Similarly, the mean squared gaps are perhaps not the last word when it comes to measuring the Riksbank’s target achievement. However, it is fair to claim that is the best way we have found so far of me assuring target achievement, that is, the extent to which the Riksbank has succeeded stabilising both inflation around the inflation target and resource utilisation around a normal level. I consider Figure 1 very clarifying.