s long - term nature. following the changeover to a flexible exchange rate in 1992, monetary policy in sweden was directed towards an explicit and quantified inflation target. the decision rule by which our monetary policy is usually guided is in fact quite simple. it states that if the forecast rate of inflation 1 - 2 years ahead is above 2 per cent, then normally the repo rate should be raised and vice versa. the reason why we chose this target horizon is that an adjustment of the monetary stance takes time to exert its full impact on inflation and the macro economy in general. although we are also able to influence inflation in the shorter run, doing so is normally inappropriate because it is liable to result in large fluctuations in production and employment. of course the rule is not applied mechanically. the basic intention is to stabilise inflation around the target and at the same time avoid unduly large fluctuations in production and employment. we tend to disregard economic shocks with effects on inflation that can be assumed to be only transitory. moreover, there may be grounds for heeding the expected course of events beyond the regular target horizon. there may be a case for adjusting the repo rate immediately if there are already strong reasons for expecting a marked increase or decrease in inflation directly after the two - year horizon. another point to remember is the riksbank's mandate to promote a safe and efficient payment system ; problems in this context may call for interest rate adjustments even though the inflation target is not threatened. such adjustments may be needed both to prevent potential risks from building up in the payment system and to moderate effects of problems that have already arisen. however, departures of this type from the normal decision rule should be made restrictively. moreover, deviations should be stated clearly, and carefully justified. favourable economic development over several years under the new regime the swedish economy has experienced several years of strong growth. since the upturn began in the summer of 1993, the annual gdp growth rate has averaged around 3 per cent. not since the period in the late 1960s and early'70s has our economy experienced growth figures like this. the favourable trend has contributed to rapidly rising employment and decreased unemployment. a look at the statistics shows that this expansion of employment is the strongest sweden has experienced since the labour force surveys were first published in the early'60s. the markedly favourable trend is not confined to growth, employment and unemployment. both the current account and the public finances are generating surpluses. another aspect of

all the time, there will be a constant need for sizeable repo rate adjustments, with the attendant marked fluctuations in market interest rates, output and employment. if temporary deviations from the central bank ’ s target are tolerated, on the other hand, monetary policy can be implemented more smoothly. a gradual adjustment of output and employment ultimately brings inflation back into line with the target. both these routes have their drawbacks. negative effects on employment and output from major changes in the repo rate are liable to erode public confidence in the central bank and the monetary policy regime. at the same time, undue acceptance of large deviations from the inflation target may weaken the target ’ s credibility and lead both to rising inflation expectations and to high costs for ultimately bringing inflation back on target. as a result, central banks tend to prefer a monetary policy strategy that lies somewhere between these two extremes, avoiding excessively large interest rate adjustments but not hesitating to adjust when this is called for. the riksbank normally formulates monetary policy with a view to inflation one to two years ahead. this unfortunately means that the repo rate has to be set with the aid of forecasts and forecasts can err. moreover, there is always the possibility of price shocks that are a - cyclical but still affect the rate of inflation. a forward - looking policy has the advantage, however, of permitting an implementation that is smoother yet firm. the riksbank reacts to the inflation forecasts in a determined manner but as the forecasts include an assessment of the extent to which inflationary impulses are transient, over - reactions are avoided. the supply shocks i referred to earlier as having occurred during the past year are examples of price fluctuations that, with the monetary policy strategy the riksbank has chosen, can occasion deviations from the inflation target. this is not the first time inflation has been affected by occasional factors. in the late 1990s, for example, successive deregulations of electricity and telecom markets resulted in deviations from the target, the difference being that at that time the gap was on the downside. what has happened now is the opposite. with our monetary policy strategy, this is a natural case of striking a reasonable balance between maintaining the fixed value of money and avoiding excessively large fluctuations in economic activity. it cannot be stressed too strongly that although the riksbank ’ s sights are consistently on the target, inflation will always tend to hover around the bull ’ s