the credibility of monetary policy — has made it possible, all else being equal, to keep inflation at target over the medium term at lower interest rates than would otherwise be required. but it is questionable whether a real rate of less than 1 % will suffice for an economy at or above full employment, with inflation already above the target, with a positive output gap, and with gdp growth that is approaching equilibrium from above. chart 1 it cannot be said that the interest rate hike took the market by surprise. according to the bank ’ s survey of market agents ’ expectations, published on monday, most respondents expected a 0. 25 rate increase before the end of the year. the share of respondents who considered the monetary stance too loose had risen steeply since august, reaching 40 %. and bond market activity in the wake of the rate hike did not indicate that the increase was unexpected. even so, the rate hike has been criticised by some of the social partners and some politicians. this suggests that the monetary policy committee did not explain well enough that sometimes it is better to raise rates now so as to avoid a much larger rate increase later on. in view of this criticism, i think it appropriate to explain this more fully. in general, central bank attempts to keep interest rates as low as possible — but as high as necessary — at any given time. what that optimum level is, however, depends on conditions, and it changes from one time to another. if central bank rates deviate from this optimum, the public will bear the expense. if they are higher than need be, inflation could fall below target and gdp growth would be weaker than it might be otherwise. if they are lower than need be, inflation could get out of hand and economic instability could take root. in that case, a much larger rate hike would be needed later on. so interest rates that are too high or too low do not come without costs to the general public. in this instance, it should not be forgotten that household mortgages tend to be long - term loans, and a majority of them are indexed to the cpi. if inflation is kept at target over the long term, these mortgage rates will be lower in the long run than they would be otherwise, even though an increase in short - term central bank rates might sometimes be required. a rate hike in the present that is consistent with current conditions contributes to lower interest rates further ahead. sometimes this happens very quickly — for instance, short - term central

than the already sizeable ones provided for in the bank ’ s forecast. the inflation outlook would then deteriorate, which would call for interest rate hikes. gdp growth would weaken as a result, perhaps even ending in a contraction. but there is always some uncertainty in both directions, and naturally, we could end up on the receiving end of positive shocks that improve the situation. but under these conditions, it is likely that the risk to gdp growth is tilted to the downside. in this connection, it is important to remember that we have seldom, if ever, been as well prepared for adverse shocks as we are now. our external assets exceed our external liabilities. our international reserves are close to an all - time high and are almost entirely financed domestically. public and private sector debt has fallen steeply relative to income in the past few years. our banks are robust, with high capital ratios and abundant liquidity, and the central bank ’ s newly published stress test indicates that they can withstand much more severe shocks than we currently consider likely. unlike many other advanced countries, we have considerable scope for economic policy to respond to shocks, as central bank interest rates are well above zero and the government is operating at a surplus and is relatively well positioned with regard to debt. the exchange rate of the krona is still strong, although it has fallen in the recent term, and the real exchange rate is estimated to be broadly as it was in late summer 2016. all in all, it can be said that our position is still relatively good, and nothing has yet happened to give cause for deep - seated pessimism. yesterday the bank announced a 0. 25 % increase in its key interest rate, to 4. 5 %. this rate hike was decided in view of economic developments and prospects, including those described in the bank ’ s new forecast, and in view of the considerable decline in the bank ’ s real rate in recent months, which stems from rising inflation and inflation expectations. one of the factors the monetary policy committee considers when it assesses the monetary stance is the central bank ’ s real rate in terms of various measures of inflation and inflation expectations. this is illustrated in chart 1, which shows that the real rate was 0. 8 % just before the last interest rate decision. this is lower than in 2013, when there was still a considerable slack in the economy. of course, the progress made in anchoring long - term inflation expectations at the target — another term for enhancing