mr. heikensten discusses monetary policy address by the deputy governor of the bank of sweden, mr. lars heikensten, at the autumn conference arranged by the centre for business and policy studies on 14 / 10 / 98. first a word of thanks for the opportunity to attend this meeting. the autumn conferences are a fine tradition to which it is a pleasure to contribute. on previous occasions i have used the opportunity to look back over the past year and discuss what the riksbank has been doing, including how monetary policy is conducted. then i have tried to look ahead and pick out some issues of importance for monetary policy in the longer run. my approach this year will be broadly the same. first a review of what has happened since last autumn, with comments on how the riksbank ’ s assessment of inflation has evolved over the year. then, as previously, a look at the question of how we communicate policy and how it has been perceived in financial markets. on this occasion we are in the throes of an international financial crisis, with great uncertainty as to what its real economic effects may be. contagious effects of the crisis have gradually become larger and larger. looking back, one can clearly see how the economic forecasts of most observers have swung during the year, from a phase of concern about a future increase in inflationary pressure to a phase of strong anxiety that the global economy will be hit by a recession. against this background i shall be discussing the current monetary policy appraisal of the swedish economy, together with some factors of importance for the final assessment. first, however, i shall briefly outline monetary policy ’ s line of thought. forecasts and probabilities monetary policy ’ s overriding objective is to safeguard the value of money. the annual rate of inflation, measured as the change in the consumer price index, is to be kept at 2 per cent. as it takes time for the riksbank ’ s monetary measures to work in full, our actions have to be based primarily on an assessment of inflation ’ s future path. the policy horizon - the period in which most of the impact of monetary policy materialises - is around twelve to twenty - four months. the riksbank ’ s assessment of future inflation is presented continuously in our inflation reports. since the first report was presented in october 1993, the content has been developed and the riksbank has, for example, become increasingly explicit in its assessments. in the first two years

way of communicating policy to the outside world and explaining the reasons for its measures. a study of the market ’ s prices, predictions and statements shows that the repo rate increase in december 1997 was broadly expected. it was, in fact, just at last year ’ s conference here that an important piece of signalling took place. as regards the repo rate cut in june, on the other hand, the pattern of market expectations changed relatively late. the implied forward interest rate curves three months earlier show that the june cut had not yet been foreseen by market players. it was mainly in connection with an interview i gave some weeks before the decision that expectations shifted to a cut. the riksbank ’ s management of information about the repo rate cut came in for market criticism. we were said to have been indistinct and to have changed our inflation assessment too abruptly. some players used big words, claiming that the lack of clarity had damaged confidence in our policy and would make it difficult to conduct an effective policy in future. i think that was overdoing it. but the riksbank should still have been able to make the market more prepared for what the future could have in store. it should also be underscored, however, that the tendencies during the spring were difficult to assess. we certainly changed our opinion but not so abruptly and for a long time it was highly uncertain what the next step would turn out to be. in such a situation, with a high degree of uncertainty, communication is difficult. one reason for not reacting to the faulty pattern of market expectations was that the forecasts of market players were in line with our own. thus it was not that we differed in the assessment of inflation prospects but that, even though the path of inflation was below the target, market prices did not represent a view that the riksbank would lower the repo rate. to put it bluntly, market players seemed to share the trade union confederation ’ s view that the riksbank acted with a “ bias ”. a clear lesson from events last spring is, in any event, the value for market observers of constructing independent forecasts of inflation as a foundation for their repo rate predictions. for the riksbank, what happened has prompted us to work even more on continuously monitoring market opinions so as to be able to react in good time if the assessments of market players seem to be deviating from our own. main scenario and balanced risks now for a look ahead