, even taking into consideration the temporary transitional factors, inflation was expected to be less than two per cent in one or two years ’ time. the interest rate was therefore reduced to 2. 9 per cent, a bit less than the european central bank ’ s repo rate. this illustrates how the riksbank works. painstaking inflation forecasts are worked out. the adjustment of monetary policy to reach the inflation target takes place successively without the bank glancing at monetary policy in other countries, except to the extent that their policies affect the riksbank ’ s own inflation forecast. by publication of forecasts, minutes from meetings and taking into account the riksbank ’ s explicitly declared objectives, the clients, the swedish people, through the riksdag, can evaluate the policies carried out.

to say in advance that inflation will deviate from the two per cent target due to such temporary effects that i have spoken about. 2. should the riksbank have other objectives besides inflation? as regards stabilisation policy, the riksbank has one task by law, namely to strive for a stable price level, that the riksbank interprets as two per cent inflation. the bank does not aim at constant prices primarily because prices and especially wages display inertia in a downward direction. it would therefore be difficult to change relative prices and relative wages if the price level was constant on average. the riksbank would also be forced to carry out a deflationary policy on repeated occasions, if constant prices were the objective. moreover, we know that quality improvements, which are reflected in rising prices, are not measured in a correct way by different price indexes. a particular ( low ) measured inflation can in fact correspond to price stability, if consideration is taken to technical development continually improving the quality of goods and services. monetary policy operates with a considerable lag. the current view is that a monetary policy change has its maximum effect six to eight quarters afterwards. this involves a considerable difficulty with respect to carrying out monetary policy as well as evaluating the policy carried out. monetary policy must therefore be elaborated taking into consideration a view of inflation over a one or two year period. therefore, the riksbank makes inflation forecasts for this time period at regular intervals. monetary policy is therefore controlled by an intermediate goal, namely the inflation forecasts. it would be unreasonable to try to immediately bring back inflation to two per cent if inflation was higher. it would require a dramatic reduction of capacity utilisation and a deterioration of the situation on the labour market. the riksbank therefore weighs in the situation on the labour market and the real activity in its assessments. in the short run, there is a trade - off between stability of the inflation rate and stability in the real economy. an unremitting stabilisation of the rate of inflation very narrowly around two per cent would at times lead to real economic instability. precisely for this reason, the target horizon is set at between one and two years, during which time the riksbank endeavours to gradually meet the inflation target, by steering inflation towards two per cent, guided by the inflation forecasts, which have been made for this period. in the long run, however, there is no trade - off between inflation and employment