central banks with a price stability target should be with regard to their own view of future developments in the policy rate. this discussion is also connected with which assumption for the policy rate the central bank should use when making forecasts of inflation and the real economy. three different approaches exist : ( i ) that the policy rate is assumed to remain unchanged during the forecast period, ( ii ) that the policy rate is assumed to follow market expectations, or ( iii ) that the policy rate is assumed to follow a path that the central bank itself considers to reflect a reasonable future development. 3 regardless of which of these three interest rate assumptions is used to produce the inflation forecast, the monetary policy decisions made by the central banks always refer only to the current level of the policy rate, that is, the level that is to apply until the next decision - making point. 4 however, the monetary policy discussion and communication differ slightly, depending on which interest rate assumption is used. see the minutes of the executive board meeting on 16 january 2007. see, for instance, eijffinger, s. and p., geerats, ( 2006 ), as well as van der cruijsen, c. and m., demertzis ( 2005 ). see, for instance, blinder, a., ( 2006 ), and kontulainen, j., d., mayes and j., tarkka, ( 2004 ). there are special exceptions to this normal procedure. for example, during the deflation crisis in japan, the japanese central bank undertook to maintain its policy rate at a low level during a certain period. for another exception, see the statement in a press release from the federal reserve, board of governors, 12 august 2003, in connection with fears that inflation would be too low. the first two approaches mean that a particular path for the development of the policy rate is taken for granted by the central bank when making its inflation forecasts. the latter approach instead means that the central bank makes its own assessment of what might be a reasonable future development in the policy rate at the same time as it makes the inflation forecast. the assumption of a constant policy rate has been the most common approach, although the trend at present is for the central banks to be clearer as to how they envisage future interest rate developments. several central banks have changed over to basing their inflation forecasts on market expectations of future developments in the policy rate. when the inflation forecast

implied forward rates reflect market expectations of the repo rate. one problem with this method is that the implied forward rates have systematically over - estimated the future repo rate path for a number of years. however, the over - estimation has been removed from the forecasting errors, with reference to the fact that the forward rates also consist of a risk premium that should not be included when using them for forecasts. different central banks have chosen different methods of illustrating the uncertainty in the forecasts and we regularly compare notes with one another. we are continuing to develop our forecasts the conclusion from this review is that the riksbank ’ s forecasts on the whole are rather good, particularly one year ahead. we have made good forecasts for all variables, with the exception of productivity, one year ahead. this is reflected in the fact that we have made more accurate forecasts than the time series model and also in the fact that the correlations are relatively high between forecasts and outcomes. in addition, the bias is small for all variables one year ahead. we have a forecasting memory two years ahead for both employment and inflation. although the correlations between forecasts and outcomes are weak one year ahead, they nevertheless show a clear relationship. on the other hand, the study implies poor forecasting memory for gdp and productivity two years ahead. the correlations between the forecasts and outcomes are also weak for these variables two years ahead. we have seen that the bias is larger for most variables two years ahead. gdp and inflation have been overestimated slightly during the period studied, and employment and productivity have been under - estimated. our inflation forecasts, particularly those for cpix, have good qualities such as high correlation with outcomes and long forecasting memories. it is worth pointing out that this is the variable that is most important for monetary policy. at the same time, the uncertainty band shows that probability that inflation will be within the riksbank ’ s tolerance interval of 1 - 3 per cent two years ahead is only around 75 per cent, despite our forecast being that it will be two per cent. on the other hand, our forecasts for the real economy are not as accurate as the inflation forecasts, although they compare fairly well with the time series model ’ s forecasts. our forecasts also compare fairly well with those of other forecasters. the result of the comparison with other forecasters shows that our gdp forecasts up to one year ahead are often among the most accurate