stabilisation of both inflation and resource utilisation is confirmed by the mean squared gaps in figure 4. the mean squared gap for inflation is the mean squared deviation between the inflation forecast and the inflation target during the forecast period. a lower mean squared gap for inflation entails a better stabilisation of inflation around the target and thus a better attainment of the inflation target. the mean squared gap for output and for hours worked is the mean squared gap for resource utilisation measured in two ways, that is using the output gap and the hours - worked gap during the forecast period. a lower mean squared gap for output or hours worked entails a better stabilisation of resource utilisation around a normal level measured as the output gap or the hours - worked gap. the closer to origo the mean squared gap for inflation and resource utilisation is, the better the stabilisation of inflation and resource utilisation. this case is special as there is no conflict between stabilising inflation and resource utilisation ; the extended repo - rate path stabilises both better than the main scenario. this is of course already obvious in figure 2, so the mean squared gap does not add much new information here. however, the normal situation is considered to be that there is a conflict between stabilising inflation and resource utilisation. in such a situation, the mean squared gap in figure 3 would lie in a north - west to south - west direction and determining monetary policy would entail weighing up whether to stabilise one more or less than the other. figure 4. the mean squared gap for cpif inflation and output and hours worked respectively. source : the riksbank figure 5 : the decision - making situation for norges bank in 2005 figure 5 shows the policy decision facing norges bank in march 2005, which is an example of a case where there was a conflict between stabilising inflation and stabilising resource utilisation. 5 the problem at that time was that the inflation forecast was under the inflation target of 2. 5 per cent, so that the gap between the forecast and the target was negative, while the forecast for the output gap was positive. in such a situation, a lower repo - rate path stabilises inflation around the target better but the output gap less well, and vice versa for a higher repo - rate path. the mean squared gap then lies in a north - west to south - west direction. this

. so, which of the two alternatives is to be preferred? the lower repo - rate path entails a lower repo rate now, while the extended repo - rate path entails a forecast of an unchanged repo rate further ahead. the lower repo - rate path can be seen as a stronger signal. a cut now may be seen as more credible than a forecast of a postponed increase further ahead. from this point of view, the low repo - rate path may be preferable. as i have argued in previous minutes, and in my speech on 24 february, there is no reason to believe that the lower repo - rate path would have a negative impact on financial stability. my colleagues have, however, previously expressed doubts about a lower repo - rate path. as you know, i do not share these doubts. it is also the case that neither the monetary policy department nor the financial stability department at the riksbank have in their analyses found any signs that a lower repo - rate path would threaten financial stability. however, in this context the extended repo - rate path has the advantage that these doubts are no longer relevant. this may therefore make the extended repo - rate path more acceptable to my colleagues. furthermore, there is a very convincing argument for the extended repo - rate path in that it provides better outcomes for both resource utilisation and cpif inflation, which can give it just as much credibility as the lower repo - rate path. the extended repo - rate path also has the advantage that the monetary policy alternatives can be reduced to the question of when we should begin to increase the repo rate : in july or september or, as i advocate, in december. the monetary policy choice thus boils down to deciding which point in time for the first increase gives the best outcomes for inflation and resource utilisation. that is, which point in time gives a forecast for cpif inflation that is as close to the target as possible and a level of resource utilisation that is as close to normal as possible. could the monetary policy decision between alternatives be any simpler, more distinct and more transparent? given this background i thus decided to advocate the extend repo - rate path rather than the lower repo - rate path as an alternative to the path in the main scenario. the extended repo - rate path stabilises inflation and resource utilisation better than the repo - rate path of the main scenario in my