Developments in recent years, with strong production growth and falling or only slightly rising employment are examples of how contradictory the signals can be. One weakness in this context is that production data is revised regularly. This makes it particularly difficult to estimate the amount of spare capacity there is in the economy at present. The picture of how high capacity utilisation was at a particular point in time can look different when new data are received and earlier outcomes are revised. One example worth mentioning is that the first data regarding GDP growth in Sweden during the first quarter of 2005 was 1.4 per cent, while the most recent calculations indicate that the figure was actually 2.1 per cent. The fact that there is considerable uncertainty regarding such a central variable as capacity utilisation is, of course, a problem. Everything would be much simpler if it were possible to quantify capacity utilisation in the same way as inflation can be measured. However, as it is not possible, I believe it is wise not to pretend to have this knowledge. For similar reasons, precise money supply measures have also been abandoned. Our forecasts of growth and inflation must nevertheless essentially be based on a view of the position of the economy with regard to a situation with normal capacity utilisation. In practice, a large amount of information from different sources must be weighed together to make an overall assessment.
The purpose of this interval is to explain that deviations from the target are unavoidable, but also that overly large deviations cannot be easily accepted if the inflation target is to remain credible. To make this clearer, monetary policy is guided by the principle that when there are deviations from the target, our aim is usually to bring inflation back to target level within two years. The tolerance interval together with this principle creates flexibility for monetary policy. This is necessary, as it is not possible for the Riksbank to control inflation with any precision in the short term. It is quite simply not within our power to maintain inflation at exactly 2 per cent all of the time. The flexibility also creates an opportunity for us to take into account real economic considerations as long as price stability is not jeopardised. Temporary deviations may thus be justified by taking into consideration growth and employment, for instance. The statutory objective of price stability must not be disregarded so it is important that the flexibility is not used in a way that would undermine confidence in the inflation target. One can say that the two-year horizon sets a limit as to how much consideration we can normally give to other aspects than price stability. The clarification of monetary policy published in 1999 also made it clear that under some circumstances it might be necessary to have an even greater degree of flexibility and allow inflation to take longer to reach the target than the usual two years.