Lars E O Svensson: Some problems with Swedish monetary policy and
possible solutions
Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the
Fastighetsvärlden's conference, Stockholm, 24 November 2010.
* * *
The opinions expressed here are my own and are not necessarily shared by other members of the Riksbank's
Executive Board or staff. I would like to thank Claes Berg, Karolina Ekholm, Stefan Gerlach, Jesper Hansson,
Per Jansson, Pernilla Meyersson, Ulf Söderström and Staffan Viotti for our discussions and their comments.
Johanna Jeansson, Lina Majtorp and Magnus Åhl have contributed to this speech.
At the most recent monetary policy meeting in October, I entered a reservation against the
majority decision. I, like my colleague Karolina Ekholm, instead advocated holding the repo
rate unchanged and having a much lower repo rate path that rises steadily to a level of
2.7 per cent at the end of the forecast period. My reason for entering a reservation on this
occasion and at earlier monetary policy meetings is because I see several problems with our
current monetary policy.
In this speech I shall present the problems I currently see in Swedish monetary policy,
discuss these problems and describe the motives for my reservation, as well as proposing
possible solutions to the problems.
An unwarrantedly tight monetary policy
According to the Riksbank's booklet "Monetary policy in Sweden" (2010a), and the Sveriges
Riksbank Act and its preparatory works, monetary policy shall aim to stabilise inflation
around the inflation target and resource utilisation around a normal level. But in practice the
Riksbank appears to have conducted a tighter monetary policy than is justified, given our
task, over several quarters. The arguments put forward for conducting this policy are that
growth is good, interest rates are very low and need to be normalised, that we need to signal
to house-buyers that interest rates will increase, that the rise in house prices and household
debts needs to be limited, and that financial imbalances could build up if we do not conduct
such a policy. At the same time, our forecast for inflation (measured as the CPIF inflation
rate) has been low in relation to the inflation target, and our forecast for unemployment has
been high in relation to a reasonable interval for equilibrium unemployment. Moreover,
research and practical experiences indicate that the interest rate increases that have been
made and are planned will probably have only minor effects on house prices and household
debts - and if anything, negligible effects on financial stability.
Several problems with Swedish monetary policy
In my opinion, there are now several problems with monetary policy in Sweden:

Monetary policy appears to have been aimed at trying to limit the increase in house
prices and in household indebtedness. However, no thorough analysis has been
made of whether house prices and indebtedness entail problems or have any
significance for future inflation and resource utilisation. At the same time,
widespread research points to the policy rate being an unsuitable instrument for this,
as it has small effects on house prices, but sizable effects on production, jobs and
unemployment.

Recently, monetary policy appears to have been aimed at slowing down growth in
GDP, and thus the recovery from what is called the Great Recession. This is
because the motivation given for the repo rate raises has been that growth in the
 Monetary policy also appears to have strived, through references to the abnormally
low repo rate, to normalise the level of the repo rate. This is despite the fact that the
repo rate should not be a target variable for monetary policy, but merely an
instrument without any inherent value.

The repo rate path in the main scenario is now far above market expectations, the
market repo rate path according to implied forward rates.1 The intended monetary
policy - the Riksbank's repo rate path - is thus much tighter than the actual
monetary policy - the market repo rate path. The fact that the market repo rate path
differs from the Riksbank's repo rate path means that the intended repo rate path is
not credible. The more expansionary actual monetary policy has probably
contributed to the strong growth and the recovery. However, if the repo rate path
becomes credible, the long market interest rates will increase substantially and
actual monetary policy will be much tighter. This risks cutting off the recovery.
Higher long market rates would also lead to a much stronger krona. A stronger
krona would lower inflation and in particular affect exports, entailing a further
tightening of monetary policy, in addition to the increase in long market rates.

In my opinion, the krona appreciation that would ensue if the repo rate path is
credible is underestimated in the main scenario of the Riksbank's Monetary Policy
Report. This appears to be because it is assumed in the main scenario that long
market rates abroad are much higher than the observed market rates. Alternatively,
it is assumed that the long market rates abroad will rise gradually in pace with
Swedish long interest rates. However, these questions have not been properly
analysed. Behind this is an assumption that certain central banks, namely the US
Federal Reserve, the European Central Bank (ECB) and the Bank of England, will
begin to raise their policy rates long before what is indicated by market pricing.
These assumptions appear unrealistic, given the statements and signals from these
central banks regarding continuing low policy rates.
I would like to propose the following possible solutions to the monetary policy problems:

Consistently choose a repo rate path that best stabilises inflation around the inflation
target and resource utilisation around a normal level, regardless of whether growth
is high or low, and regardless of whether the repo rate is high or low.
 If the chosen repo rate path then offers a threat to financial stability - which would
appear to be a rare situation - take this into account and exclude the repo rate path
if this is appropriate, with a clear justification.

Take into account house prices and household borrowing if they affect the forecasts
for inflation and resource utilisation in the short or long term.

If the level of house prices and household borrowing become unsustainable, or are
otherwise judged to entail problems, use other and better instruments to deal with
this than the repo rate. Trying to use the repo rate to slow down house prices and
household debt could lead to high costs for the real economy in terms of lower
production and employment, and higher unemployment. However, before choosing
the right instrument we must specify the problems more precisely.

Start the decision-making process by forecasting inflation and resource utilisation on
the basis of market expectations in Sweden and abroad according to implied
forward rates, to determine whether a higher or lower repo rate path than these
market expectations is needed.
 Then make forecasts of inflation and resource utilisation on the basis of alternative
repo rate paths to determine which path best stabilises inflation and resource
utilisation. As I discuss in more detail later on, these forecasts can be constructed
using what are known as anticipated or unanticipated deviations, depending on
whether or not the repo rate paths are expected to be credible.
 Normally, the repo rate path that is included in the main scenario of the report
should be chosen so that it best stabilises inflation and resource utilisation when it is
credible.

Use as an initial basis the actual market rates abroad and market expectations
according to implied forward rates, and only assume different policy rate paths for
central banks abroad if there are particular and clear reasons for doing so. As I will
discuss in more detail later on, other policy rate paths than the expected ones
require special treatment to correctly determine the exchange rate effect.
Stabilise inflation around the inflation target and resource utilisation around a normal
level
The booklet "Monetary policy in Sweden" states that the Riksbank, in addition to stabilising
inflation around the inflation target, also strives to stabilise production and employment
around sustainable paths, and thereby conducts a policy of flexible inflation targeting.
Monetary policy thus involves choosing the repo rate path that best stabilises inflation and
resource utilisation. Stabilising inflation stems from the objective of price stability in the
Sveriges Riksbank Act. Stabilising resource utilisation stems from the emphasis in the
preparatory works for the Sveriges Riksbank Act, that the Riksbank, without prejudice to the
price stability target, should support the goals of general economic policy with a view to
maintaining sustainable growth and a high rate of employment.
House prices and household debt
The arguments for raising the repo rate more than is justified by inflation and resource
utilisation have emphasised developments in house prices and household indebtedness.
There have also been references to potential financial imbalances building up. However,
these arguments do not show what effect the repo rate is expected to have on house prices
and indebtedness, or which financial imbalances are referred to. Nor is it clear what effects
and risks might be involved, or how we can evaluate the effects and risks in relation to the
cost of inflation and resource utilisation being too low.
As household debt mostly consists of mortgages and these are used to buy housing, house
prices and household debt are really two sides of the same coin. If house prices increase,
then household debt increases. If we want household debt to increase more slowly, then
house prices must increase more slowly.
Thus, slowing down the increase in house prices and the increase in household debt is
essentially the same thing. Regardless of whether or not these factors are a problem, the
repo rate would appear an unsuitable instrument for influencing house prices and debts.
Widespread theoretical and empirical research shows that changes in policy rates have little
effect on house prices, but a substantial effect on production, jobs and unemployment. A
typical conclusion is that, all else being equal, an increase in the policy rate of 1 percentage
point reduces house prices by around 1.5 per cent, but at the same time reduces GDP by
around one third, that is, about 0.5 per cent. So to reduce house prices by 15 per cent may
require raising the repo rate by as much as 10 percentage points. But this would cause GDP
to fall by around 5 per cent. These estimates are of course uncertain, but nevertheless imply
very high real costs in terms of GDP.2
If house prices and household indebtedness would be regarded as a problem, there are
more effective instruments than the policy rate, which also have less negative effects. Some
examples are the mortgage ceiling introduced by Finansinspektionen (the Swedish Financial
Supervisory Authority), a mortgage tax or limited tax deductions for mortgages, a property
tax, a reserve requirement for mortgages, and so on. As a comparison, a higher repo rate
functions not only as a tax on mortgages, but also a tax on loans for production, investment
and trade. This in turn leads to the large costs to the real economy I mentioned earlier.
Are house prices and household indebtedness a problem?
More generally, if house prices and household indebtedness are regarded as a problem,
then this problem needs to be analysed and specified in greater detail to assess which
means can be used to deal with it. Is the problem some form of market failure? Does it
involve an externality? Is it due to a lack of information to borrowers, and is it thus a
consumer protection issue? It is only when we have specified the problem that we can
determine suitable measures to deal with it.
However, as far as I can see, there is hardly any indication that current house prices and
household indebtedness are a problem.
In Sweden, mortgages do not present any threat to financial stability. This is because
- unlike in the United States - mortgages are personal (what are known as full recourse
loans). They do not lead to any loan losses of significance for the mortgage institutions.
Mortgages did not lead to any loan losses worth mentioning even in the 1990s crisis - the
banks' loan losses were primarily caused by loans for commercial property. Household debt
thus does not present any threat to financial stability in Sweden.
Can house prices and household debt involve any other problems? I cannot see any
indications that a house price bubble is building up or that house prices will become
unsustainable in the longer run. The house price indicator published by The Economist
usually points to Swedish house prices in relation to rent levels being over-valued by up to
40 per cent. However, this indicator disregards the fact that Swedish rent control means that
rents are much lower than the corresponding market rents. Most indications are that house
prices are compatible with the high demand and modest supply. In Sweden, there is no "buy
to let", only "buy to live". Homes are primarily bought to live in, rather than as objects for
investment or speculation. Moreover, households have strong balance sheets. When it
comes to assessing possible vulnerabilities, the levels of the balance sheet are more
important than the flows. A lot of fuss is made of household debt now being around 165 per
cent of households' disposable income and increasing (see Figure 1). But at the same time,
household wealth is about 500 per cent of their disposable income. Moreover, the debt share
of the assets remains stable over time. The average household thus has debts equivalent to
only one-third of its assets, while its equity is equivalent to two-thirds of its assets. This low
leverage and high equity implies a large buffer against a fall in house prices.
According to the report of Finansinspektionen (2010) (the Swedish Financial Supervisory
Authority), borrowers who have new mortgages and thus the largest ones, are not
particularly vulnerable and can manage extreme stress tests with higher unemployment and
large falls in house prices. In general, these borrowers' debt-servicing ability is very good,
even when mortgage rates are much higher. The banks' credit assessments and housing
cost calculations are actually conservative; based on high mortgage rates, from 6.5 per cent
and up to 10 per cent. With an interest rate of 7.5 per cent, 92 per cent of households will
have a surplus in a "left-to-live-on" calculation that includes generous standard deductions for
the cost of living. Most households have very large surpluses, because it is the households
with very high incomes that have the largest debts. If unemployment increases by a good
10 percentage points, that is, from almost 9 per cent to almost 19 per cent, and house prices
fall by 20 per cent, according to the report only 4.5 per cent of these households will
experience both a deficit in their "left-to-live-on" calculation and a loan-to-value ratio of more
than 100 per cent.
One important circumstance is that households' savings ratios are currently high, from an
historical perspective (see Figure 1). This indicates that mortgages are not being used to
fund consumption to any great extent. Things were different prior to the 1990s crisis. At the
end of the 1980s, increased mortgages were used to fund household consumption to a large
degree. This is a dangerous situation, as continued price increases then become a condition
for continued mortgage increases and to uphold consumption. But this is evident in a low
saving ratio. The saving ratio at the end of the 1980s was strongly negative. This indicates
that households were living above their means, which is an unsustainable situation. This was
also the case in the United States before the recent crisis, when the saving ratio was very
low and consumption was funded by higher mortgages. The situation in Sweden now is quite
different. House prices may rise or fall because of changes in the real economy. The
consequences for monetary policy of a fall in house prices need not be so problematic. If this
led to a fall in consumption, it would be a demand shock, which would cause lower inflation
and resource utilisation. However, this could to a large degree be counteracted by more
expansionary monetary policy, particularly if a relatively high percentage of borrowers with
variable-rate mortgages meant that monetary policy had a greater impact.3
Levels are more important than growth
The main message in the most recent Monetary Policy Reports and Updates has been that
the Swedish economy is strong. GDP growth is good and unemployment has begun to fall.
levels
This has justified raising the repo rate. But at the same time, the of GDP, investment
and exports are still low, compared with the pre-crisis levels. At the same time, the level of
unemployment is much higher. The forecast for CPIF inflation is also lower than the inflation
target.
Given this, my view at the October meeting was that it would be better to hold the repo rate
unchanged than to raise it. Raising the repo rate will slow down the upturn, keep
unemployment high and hold down CPIF inflation. In contrast, an unchanged repo rate would
reduce unemployment, bringing it closer to a normal level, and increase CPIF inflation,
bringing it closer to the target. This is also shown in the repo rate scenario with an
unchanged rate in the October Monetary Policy Report. Figure 2 shows the repo rate path
given in the main scenario, and also a higher path and a lower path, with the corresponding
forecasts for CPIF inflation and unemployment and also the mean squared gap for inflation
and unemployment.4 A lower mean squared gap for inflation or unemployment entails a
better stabilisation of the variable in question (see Svensson 2010a, b for further discussion).
The mean squared gap shows that the lower repo rate path entails better-balanced monetary
policy, as both inflation and unemployment are stabilised better.5
The fact that a majority of the Executive Board chooses to raise the repo rate despite the
forecast for inflation undershooting the target and the forecast for unemployment being high,
indicates that monetary policy is addressing something other than inflation and resource
utilisation. The fact that high GDP growth is used as an argument in favour of raising the
repo rate could be interpreted to mean that monetary policy in practice aims to slow down
growth.
Figure 3 shows GDP developments in Sweden, the eurozone, the United Kingdom and the
United States. Compared with the other economies, GDP fell most in Sweden - a total of
almost 8 per cent. It has now recovered to a level that is about the same as the eurozone,
higher than in the United Kingdom but far below that in the United States.
One could claim that the other economies have substantial structural problems, including
problems in the financial sector. Sweden has suffered a pure demand shock through exports,
but the Swedish economy has no comparable structural problems in the financial sector or
elsewhere in the economy. One might then claim that the level of potential production and
perhaps also its growth may have fallen more in the other countries than in Sweden. In that
case, the output gap is more negative in Sweden than in the other countries, with the
possible exception of the United Kingdom. Using the output gap as a measure of resource
utilisation, the situation in Sweden does not look too good.
Unemployment has increased in Sweden, the eurozone, the United States and the United
Kingdom (see Figure 4). Since the first quarter of 2008, unemployment has risen most in the
United States and around the same amount in Sweden, the eurozone and the United
Kingdom (see Figure 5).
The unemployment gap, which is the difference between unemployment and equilibrium
unemployment, is shown in Figure 6. For Sweden I am assuming that equilibrium
unemployment is 5.5 per cent, and for the other economies I have used common
conventional estimates. We see that the unemployment gap is biggest in the United States,
next biggest in Sweden and lowest in the United Kingdom and the eurozone. If we assume
that equilibrium unemployment in Sweden is 6 per cent instead of 5.5 per cent, we have the
same ranking for the unemployment gap. If we assume that equilibrium unemployment is as
high as 6.5 per cent in Sweden, the unemployment gap is about the same as in the
eurozone and the United Kingdom.
These level figures showing GDP and unemployment undoubtedly provide a more nuanced
picture of the Swedish economy and the level of resource utilisation than merely looking at
GDP growth. Given these figures, we can wonder what justification there is for tightening
monetary policy in Sweden when the central banks in the other three countries are still
conducting very expansionary policies.
In the United States, Federal Reserve Chairman Ben Bernanke (2010) recently held a
muchpublicised speech, in which he observed that the forecast for inflation was too low and the
forecast for unemployment too high, in relation to the levels compatible with the Federal
Reserve's mandate. He therefore drew the following conclusion: "given the Committee's
objectives, there would appear - all else being equal - to be a case for further action". Since
then, the Federal Open Market Committee (FOMC) has announced that interest rates will
remain low and announced a new programme for buying government bonds (called
Quantitative Easing, QE2). As we saw in Figure 3, GDP in the United States fell less than
that in Sweden during the crisis. As I noted earlier, potential GDP in the United States may
well have fallen more than that in Sweden. A correct GDP gap could then very easily be
more negative in Sweden than in the United States.
The repo rate is not a target variable that needs to be "normalised"
Another argument in favour of raising the repo rate has been that it needs to be "normalised".
According to this argument, it would be better - all else being equal - to have a repo rate
closer to a normal level. As the repo rate is now so abnormally low, a "crisis rate", it should
be raised or at least not cut, even if this means we are further from the inflation target and
resource utilisation is even lower than normal.
I do not agree with the normalisation argument. In my opinion, the repo rate and the repo
rate path have no value in themselves - they are not target variables. A "normal repo rate" is
not a target for monetary policy. There is nothing to say this would be the case, neither in the
Sveriges Riksbank Act or its preparatory works, nor in the booklet "Monetary policy in
Sweden". Instead, I believe that the repo rate should in all situations be set so that inflation
and resource utilisation are stabilised as far as possible, regardless of whether this requires
a high or a low repo rate and regardless of whether there is a crisis or not.
A repo rate path way above market expectations
The repo rate path is much higher than market expectations according to implied forward
rates. The repo rate path corresponds to much higher market rates than the current ones. If
the repo rate path were to become credible, it would lead to a significant increase in long
interest rates and a large appreciation in the Swedish krona, which would risk strangling the
recovery in exports and GDP, raising unemployment and lowering inflation.
The reasoning can be explained with the aid of some figures. In Figure 7 the red curve
shows the repo rate path in the main scenario, and the blue curve shows implied forward
rates according to Swedish market rates. The curves gave been extrapolated beyond the
usual three-year horizon, to a five-year horizon.6
Figure 8 shows the yield curves corresponding to the curves in Figure 7. The yield curves
show short and long interest rates, more precisely a zero coupon rate as a function of
maturity according to the horizontal axis. The difference between the red and blue yield
curves shows what would happen to interest rates for various maturities if the repo rate path
were to become credible. This would cause the blue yield curve to shift upwards to the red
one. A three-year interest rate would thus increase by approximately 60 basis points, and a
five-year interest rate would increase by closer to 90 basis points.
Normally, the Riksbank's wish and endeavour is that the repo rate path is credible, and
incorporated into market expectations and market pricing. In this way, monetary policy has
the largest possible impact. This time, it seems to be less desirable. If the repo rate path
were to become credible, long interest rates would rise drastically, which would mean a
substantial tightening of monetary policy in relation to the present situation. In my opinion,
the repo rate path in the main scenario should be one that we want to immediately become
credible, if it is not already credible. That is, the repo rate path of the main scenario should
be chosen such that is best stabilises inflation and resource utilisation when it is credible.
Why such a modest krona appreciation in the main scenario?
The main scenario includes a fairly modest appreciation of the krona. Why isn't it bigger?
There are two possible explanations and equivalent interpretations of the main scenario. One
is that the main scenario in reality assumes higher long interest rate abroad than current
market rates. As the exchange rate is affected by the difference between long domestic and
foreign market rates, that is, the difference between domestic and foreign market yield
curves, the main scenario thus underestimates the appreciation in the krona.
In Figure 7 the grey curve shows TCW-weighted implied forward rates according to market
rates abroad. In Figure 8 the grey curve shows the corresponding TCW-weighted yield curve.
The difference between the blue and grey curves in Figure 8 for a 5-year maturity shows that
the current difference between a Swedish and a foreign five-year rate is around 70 points. If
the repo rate path becomes credible, the difference between the red and grey curves in
Figure 8 shows that the difference between a Swedish and a TCW-weighted foreign five-year
rate would rise to around 160 points. This large interest differential in the main scenario
should lead to a large krona appreciation. Such an appreciation of the krona would in turn
contribute to significant tightening over and above the increase in long interest rates, which
would have a particularly severe impact on exports and inflation. The reason why this does
not occur in the main scenario is that the main scenario assumes higher long-term market
rates abroad than the actually prevailing market rates.
More specifically, the main scenario assumes a forecast for TCW-weighted interest rates
abroad that are much higher than the current market expectations a couple of years from
now. In Figure 7 the yellow curve shows the main scenario's forecast for TCW-weighted
interest rates abroad. The main scenario moreover assumes that all market agents in
Sweden and abroad will not only believe in the repo rate path, but will also believe in the
Riksbank's forecast for interest rates abroad. The main scenario in the Riksbank's report
assumes that this belief is incorporated in market expectations of foreign interest rates and
included in the pricing of foreign market rates. The yellow curve in Figure 8 shows the foreign
yield curve that would then arise. The main scenario thus assumes that long-term interest
rates abroad are much higher than prevailing market rates (which are represented by the
grey curve in Figure 8). The difference between a Swedish and a foreign five-year interest
rate is approximately 60 basis points, much less than the difference of around 160 basis
points described above. According to the latter, greater difference, the main scenario will
lead to a much stronger krona appreciation.
It is important to understand that it is the actual difference between long-term Swedish and
long-term foreign market rates that affects the prevailing exchange rate. This is the case
regardless of whether or not these long-term interest rates correspond to market
expectations of short-term rates. It thus applies regardless of whether or not long-term
interest rates are affected by depressed forward premiums (for instance, as a result of the
Federal Reserve's purchases of government securities). It also applies regardless of whether
market expectations are good and reliable forecasters of future interest rates. The
assumptions we make about long-term Swedish and foreign interest rates are thus important.
This was one possible explanation why the main scenario contains such a modest krona
appreciation. The other possible explanation and corresponding interpretation of the main
scenario can be described as follows. In Figure 7 the red and yellow curves show the
Riksbank's forecasts for the repo rate and the TCW-weighted policy rates abroad,
respectively. At the same time, the blue and grey curves show market expectations of the
repo rate and the TCW-weighted policy rates abroad, respectively. If the current repo rate
and the actual policy rates abroad develop over time according to the red and grey curves,
the market will be surprised if the repo rate and foreign policy rates are raised more quickly
than expected. The market will then gradually raise its expectations of future interest rates.
That is, over time the blue and grey curves will show an upward shift. This means that the
corresponding blue and grey yield curves in Figure 8 will shift upwards over time. If they shift
upwards in tandem, the interest rate differential between long-term Swedish interest rates
and interest rates abroad does not change, and there is thus no large krona appreciation.
According to one of the interpretations of the main scenario, the assumption is thus that
longterm market rates abroad are much higher than the prevailing observed market rates.
According to the other interpretation, the assumption is that long-term market rates abroad
will rise gradually in pace with Swedish long-term interest rates. It is not clear from the
Monetary Policy Report which interpretation is correct. The questions regarding the two
interpretations have not been thoroughly analysed.
Unrealistic assumption regarding foreign policy rates
In both of these interpretations of the main scenario the high TCW-weighted foreign policy
rate path plays an important role. Behind the main scenario's TCW-weighted repo rate path
lies the assumption, in my opinion an unrealistic one, that the Federal Reserve, the ECB and
the Bank of England will start to raise their policy rates sooner than is indicated by prevailing
market rates. For example, both the Federal Reserve and the Bank of England are assumed
to start raising their policy rates within a year.
If one is to produce a forecast for foreign policy rates that deviates from market pricing, I
believe that great emphasis should be placed on the assessments made by the Federal
Reserve, the ECB and the Bank of England themselves, as well as on the signals they give.
These institutions have better information on their own economies, greater resources for
analysis and investigation and, above all, better information regarding their own plans. In my
opinion, one must have strong and clear reasons for arriving at another conclusion than that
stated and signalled by these central banks themselves.
The statements and signals from the Federal Reserve are hardly compatible with a forecast
that they will begin raising their policy rate in 2011. Here I refer for instance to Ben
Bernanke's recent speech (2010) and to the most recent decision by the FOMC on a new
round of Quantitative Easing (QE2), which means that the Federal Reserve will buy
government bonds regularly up to summer 2011 for the purpose of lowering long-term
interest rates in the United States.
As regards the ECB, in my opinion the best information and signals are those presented in
the ECB Staff Forecast (2010) at the beginning of September. The forecast is based on an
assumption that the Eonia interest rate, the overnight rate in the eurozone, will follow market
expectations. The forecast shows that inflation will be below the ECB's target of "below, but
close to, 2 per cent" and that the real economy will be weak. If anything, it indicates that the
ECB will follow a policy rate path that is lower than market expectations.
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