. earlier on, we used to set the rate by averaging the mean of the bid / offer rates polled from a few select banks as at 12 noon on every working day. a few months ago we changed the method. now we poll a select list of contributing banks at a randomly chosen five minute window between 11. 45 am and 12. 15 pm and put out the reference rate at 12. 30 pm. the contributing banks are selected on the basis of their market - share in the domestic foreign exchange market and representative character. the reserve bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate remains a true reflection of market activity. ( v ) data interpretation : need to look behind the data 43. information technology has improved data availability. paradoxically, this has also increased the likelihood of misinterpretation of data. in his recent book, thinking, fast and slow, daniel kahneman explains where we can and where we cannot trust our intuition and how we can tap into the benefits of slow thinking. orphanides, a ( 2001 ) : ‘ monetary policy rules based on real - time data ’, american economic review, 91, 964 – 985. bis central bankers ’ speeches 44. consider an example : in a recent financial daily, an analysis based on last quarter operating results of indian companies claims that interest costs were 11. 1 per cent of total revenues, and infers on that basis that a cut in rbi ’ s rate can make a significant difference to the prospects of profits of firms. 4 arithmetically, this is correct and will make the reader believe that high interest costs have adversely impacted profitability. the reader would also intuitively attribute the deceleration in real gdp growth to 6. 5 per cent in 2011 / 12 to the increase in the policy rate of the reserve bank by 375 bps during march 2010 – october 2011. but a closer look at the same sample suggests that the data used for this analysis includes financial and insurance firms which typically have interest to sales ratio of as high as 65 per cent. in contrast, non - financial firms, which account for more than 85 per cent of business, have interest cost of only 2. 7 per cent of sales. therefore, it is necessary to look behind the data and explore what lies underneath. 3f 45. consider another important variable – the real interest rate. research in the reserve bank shows that real interest rate and investment activity are inversely related

n., and e. nelson, ( 2001 ), ” optimal horizons for inflation targeting ”, journal of economic dynamics & control, 25, 891 - 910. see footnote 2 for details. ” monetary policy in sweden ” replaces the clarification of monetary policy published in 1999, see heikensten, l. ( 1999 ), ” the riksbank ’ s inflation target – clarifications and evaluation ”, sveriges riksbank quarterly review, 1999 : 1, 5 - 17. in this context, let me also mention something about risks. more specifically, the risks connected to rising asset prices and credit expansions. this is a question that has been much discussed in recent years, both between central banks and within the academic world, as house prices have risen rapidly in many countries including sweden. this debate could in itself be the topic of a speech so let me just briefly say that the position of the riksbank is that we do not consider it to be reasonable to entirely ignore these risks, even though it might be difficult to take these risks into account in the usual forecasting process. we have therefore acted to reduce these risks and to contribute to a calmer adjustment in house prices. the inflation forecast and future interest rate developments one of the recent changes in our strategy was the assumption regarding the development of the policy rate, which is used as a base for our forecasts. like most central banks with an inflation target, the riksbank previously made forecasts under the assumption that the policy rate would not change during the forecast period. since october last year we instead use an assumption that has gained in popularity among central banks, namely that the policy rate will develop in line with market expectations, as reflected in implied forward rates. the earlier assumption had the advantage that it illustrated in a simple manner when there was reason to change the policy rate. if inflation two years ahead was expected to be lower than two per cent, this was a signal that the interest rate needed to be cut, and if it was expected to be higher, the rate needed to be raised. of course, this rule could not capture all of the nuances in the monetary policy considerations, but it provided a rough explanation of the monetary policy decisions. however, there were also disadvantages. in normal cases it is not, for instance, particularly realistic that the policy rate would remain unchanged a couple of years ahead. the fact that the forecasts were based on this assumption made it