. monetary policy, on the other hand, does not have any marked effect on the real interest rate in the long run. however, monetary policy does influence the rate of inflation and inflation expectations. if monetary policy is based on an inflation target that is perceived as credible, long - term inflation expectations will coincide with the inflation target. in other words, we can say that the long - term nominal interest rate is determined by two factors : • the long - term real interest rate, which in turn is determined by structural factors and is global, and • the inflation target, which monetary policy can make credible. i shall discuss these two factors today and speculate how they may develop in the really long term. firstly, i intend to take up the fact that real interest rates have shown a falling trend over a long period of time at a global level. what factors lie behind this? will the trend prevail and, if so, what consequences will it have for monetary policy? and what will it mean for households and companies? bis central bankers ’ speeches secondly, i will discuss the inflation target. here in sweden the target has been 2 per cent since it was introduced in the mid - 1990s. most other countries with inflation targets also have their targets at around 2 per cent. what are their experiences of having a target at this level? should the level be lower or higher? interest rates have thus been very low for a long time now, but it is reasonable to expect that in the long run they will be 3 – 4 times higher than they are now. this must be taken into account ; otherwise decisions taken today will have major consequences much further ahead. it is thus important to remember that the conditions applying today will not apply for decades into the future. lower real interest rate trend since the 1980s as the process of financial and economic integration in the global economy has increased, common factors such as global growth and global saving have played an increasingly large role with regard to interest rates. 1 real interest rates have fallen around the world which justifies calling this a global real interest rate. the fall is in the order of 4 – 5 percentage points since the 1980s. 2 as sweden is a small, open economy, the long - term global real interest rate can be regarded as an anchor for the swedish real interest rate. during brief periods, the real interest rate in sweden may deviate from the global real interest rate, but over longer periods of time the swedish real interest rate will be determined by global factors

inflation percentage 12 - month change 3. 5 3. 5 3. 0 3. 0 2. 5 2. 5 2. 0 2. 0 1. 5 1. 5 1. 0 0. 5 1. 0 hicp 0. 5 underlying inflation ( hicp excl. energy and unprocessd food ) 0. 0 ap r - 0 ju n00 a ug - 0 o ct - 0 d 0 ec - 0 fe b01 ap r - 0 ju n01 a ug - 0 o ct - 0 d 1 ec - 0 fe b02 ap r - 0 0. 0 source : eurostat 4. number of employed in total, excl. sick and all absent from work 1987 : 01 - 2002 : 04 the series are seasonally - adjusted with a 3 - month sliding average sysselsatta minusthose franvarande pga. egen sjukdom employed minus on sick leave sysselsatta minusall samtliga employed minus leave offranvarande absence total number of employed sysselsatta totalt source : statistics sweden ( aku ) 5. cpi and inflation expectations of households and firms, per cent cpi households, statistics sweden households, national institute firms - 1 - 1 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 sources : national institute of economic research and statistics sweden 6. inflation : outcomes and the main scenario percentage 12 - month change kpi cpi und1x undinhx undimpx - 1 - 1 - 2 - 2 sources : statistics sweden and the riksbank