. with last autumn ’ s implied forward rate, inflation never reaches the inflation target, while, with an unchanged repo rate, it can be expected to overshoot the target just beyond the traditional two - year horizon. what this example illustrates is that an unchanged repo rate entailed a continued rise in resource utilisation, which in turn drove up inflationary pressures beyond the two - year horizon. at the same time, the forecast based on the market ’ s assessment of the future repo rate shows that there didn ’ t have to be any hurry to begin to hike rates. a repo rate path consistent with implied forward rates led in this example to inflation never reaching the target. examples like this can of course never give an exact answer to when the repo rate should be adjusted. what they can do is increase our understanding about the consequences of different options. in this case they can help us to narrow down a number of reasonable scenarios for policy a few quarters ahead. and in this particular example an unchanged repo rate was certainly one such reasonable option for a period. allow me for safety ’ s sake to emphasise that the conclusions for monetary policy of both the alternative forecasts – the inflation report ’ s usual main scenario and the estimates based on implied forward rates – can generally be expected to be the same. regardless of whether we reason on the basis of the simple policy rule, which relates the forecast of inflation one to two years ahead – under the assumption that the repo rate is held constant – to the current decision, or whether we study forecasts based on implied forward rates, for example, we can reach the conclusion that it was reasonable to leave the repo rate unchanged in december and that the repo rate sooner or later will need to be raised. the point is that paths derived from different interest rate assumptions make it possible to some degree to quantify and weigh up various monetary policy options against each other. so, to sum up it is easy to see that the monetary policy communication can be made easier in various ways if the forecast horizon is extended. the new methods that have been developed can also facilitate the creation of alternative scenarios to more clearly understand and communicate the considerations facing the bank. conducting monetary policy i should like to conclude by mentioning a third perspective. this does not concern methodology for forecasting, or how monetary policy is communicated, but how policy is actually conducted. from time to time the view is expressed in the general debate that monetary policy should be conducted

interest rate paths can be used to illustrate the choices facing monetary policy. let me use the riksbank ’ s interest rate decision in december 2004 as an example. on that occasion we left the rate unchanged despite the fact that inflation was forecast to be below our target of 2 per cent during the greater part of the next two years. with inflation forecast to be so low during such a large part of the forecast period it would have been possible to justify a further rate cut. but there were also arguments in the opposite direction. the most important was that demand was already growing markedly faster than the economy was deemed capable of sustaining in the long run. the vigorous growth was anticipated to continue and so it wasn ’ t weak demand that was causing the low inflation. instead, the low inflation was being caused by unexpectedly high productivity and unexpectedly low price increases for imported goods, something that in itself could be expected to further stimulate growth in the period ahead. an additional factor was that the repo rate was already at an unusually low level, which could partly explain the increase in households ’ debt burden and the continued rise in housing prices. even though debt levels were not deemed to be a threat to financial stability, another rate cut could have further fuelled house price inflation and indebtedness. that in turn could have given rise to future problems when monetary policy eventually would most likely have to be tightened. none of these arguments in themselves were the key factor in deciding to leave the repo rate unchanged, but taken together they indicated nevertheless the need for a certain measure of caution. in this kind of situation it can be interesting to consider how different future paths for the interest rate can be expected to affect both the real economy and inflation. figure 6 shows resource utilisation in two different cases : one based on an unchanged repo rate and another on the implied forward rates that applied during the autumn. at that time the implied forward rates were indicating that the repo rate would be raised very shortly and that it would then rise to levels around 4. 5 per cent in the longer term. resource utilisation picks up in both cases, turning positive after about a year. but if the repo rate is raised according to the implied forward rate at the time, resource utilisation drops, turning negative again during 2007, whereas it remains positive throughout the whole period covered by the example if the rate is held constant. the situation also differs somewhat between the two alternatives when it comes to inflation ( see figure 7 )