to that of the market. this also enables us to influence market expectations more directly in the short term. let me illustrate this by some examples : in connection with the inflation report in october last year, we said that we thought that the implied forward rate path on that occasion gave rise to reasonable inflation developments in the coming years. consequently, no great changes occurred in market expectations when we published the report ( see figure 2 ). in connection with the december report, we considered that the market was correct in anticipating an increase in the repo rate at the beginning of 2006 but that the rise might be a bit quicker in the winter and spring than that reflected by the path of implied forward rates. when the monetary policy decision was announced, the market reacted consistently this time as well by the implied forward rate path shifting in a way that reflected the expected interest rate increases taking place earlier ( see figure 3 ). let me take the opportunity here to touch on a question that sometimes arises when we comment on market expectations of the development of the repo rate in connection with a monetary policy decision : what expectations do we normally relate to when making our interest rate decision? the expectations reflected by the implied forward rate path on which the forecasts in the inflation report are based, or the expectations applying at our monetary policy meetings? it is unavoidable that some time passes from finishing the forecasting work to the publication of the inflation report. new information can become available during these days that affects the implied forward rate path. at the monetary policy meeting, the executive board always makes an assessment of whether the new available information since the forecasts were made gives rise to any change in the analyses and forecasts. if this is the case, it is explained in connection with the presentation of the report and the announcement of the monetary policy decision. however, the path of implied forward rates changes from day to day and over time as new information is received and new assessments are made. there is no reason for the riksbank to comment on every small shift of the implied forward rate path in hundredths or tenths. the precision of the inflation forecasts is hardly so great that it is worthwhile attempting to distinguish the consequences of minor shifts in the interest rate path for our forecasts. principles that guide the monetary policy decisions in the new interest rate assumption when our forecasts were based on an unchanged repo rate, monetary policy could be explained by the simple rule of thumb that i described – the repo rate would normally

before, our inflation forecasts were previously based on the assumption that the repo rate would not change during the forecast period. the assumption of an unchanged repo rate in some ways made it easy to justify changes in monetary policy. guided by this assumption, monetary policy could, somewhat simplified, be described by the following rule of thumb : if the forecast inflation, given an unchanged repo rate, deviated from the target, the repo rate should normally be raised or lowered. even though this arrangement worked fairly well from a communication point of view, there are clear advantages in basing forecasts on a more reasonable assumption of the development of the repo rate. let me give a brief account of some of these : the assumption that the repo rate would develop in accordance with implied forward interest rates should in the long run provide more realistic assessments of the future repo rate than the assumption of a constant repo rate. this is particularly the case when there are market expectations of considerable changes in the repo rate during the forecast horizon. for instance, it is difficult in such circumstances to combine the assumption of a constant repo rate with reasonable forecast paths for the exchange rate and long - term interest rates since these are affected by market expectations about movements of short - term interest rates. this in turn also affects the forecasts for growth and inflation. the new interest rate assumption therefore creates the prerequisites for making better inflation forecasts and also more coherent forecasts for individual macro variables. this will eventually improve the basis for monetary policy decisions. another advantage of making forecasts on the basis of a more reasonable assumption about future interest rates is that it will be easier to assess the forecasts. in normal cases, it is not realistic to assume that the repo rate will remain unchanged in a two - year perspective. an inflation forecast based on that assumption will therefore normally be inaccurate. it will thus also be difficult to make meaningful evaluations of the inflation forecasts. an additional advantage of basing the forecast on the assumption that the repo rate will develop in accordance with market expectations is that it will be easier to compare the riksbank ’ s forecasts with those of other forecasters, which are not normally based on an assumption of an unchanged repo rate. in connection with our changing the interest rate assumption, we also extended the forecast horizon. a longer time horizon will, for instance, make it easier to show that certain types of disturbances only affect inflation temporarily and why it is