the consumer price index, cpi, is to be 2 per cent. in addition, we have formulated a tolerance interval around the target of plus / minus 1 percentage point. the tolerance interval marks both the fact that monetary policy cannot achieve the target exactly all of the time and the fact that excessive deviations cannot be accepted if the target is to remain credible. to further enhance clarity, monetary policy is guided by a principle according to which the aim is normally to bring inflation back to target within two years after a deviation has occurred. the two - year horizon makes it possible to bring back inflation to the target gradually and in this way to avoid excessive fluctuations in the real economy. the target horizon thus allows flexibility in monetary policy, while helping to anchor inflation expectations. the policy rate ’ s path to inflation takes time the riksbank ’ s target is to maintain a low and stable level of inflation. we can influence inflation by means of our steering interest rate, the repo rate. through the steering system, the riksbank aims to keep the shortest market rate, the overnight rate, close to the repo rate. the overnight rate in turn affects the interest rates faced by the general public, and thereby activity and prices in the economy. so, the repo rate expresses the level at which the riksbank wants the overnight rate to lie. interest rates with a slightly longer duration, for instance 3 months, are determined in the financial markets, partly by expectations of what the repo rate will be on average during this period. banks ’ lending rates to households and companies and interest rates on securities with different durations are affected therefore by both the actual and expected repo rate. in the slightly longer term there is greater uncertainty and it may be difficult to form an opinion of the future repo rate. the long - term inflation expectations then play an important role. here we can mainly have an effect by conducting a credible monetary policy. long - term interest rates are also affected by the economic outlook and by long - term growth. the level of the repo rate is set so that inflation will be close to the target within a couple of years at the same time as inflation and the real economy should not show excessive fluctuations. what is known as the transmission mechanism is often described in terms of the different channels through which the repo rate has an effect on the real economy and inflation ; the interest rate channel, the credit channel and the exchange rate channel. according to the “ interest rate channel ”

of england and the ecb coordinated measures to meet the banks ’ needs of short - term financing. the riksbank expressed its support for this action, although we did not consider it necessary to take corresponding measures in the swedish financial system. it is not self - evident what the role of the central bank should be when uncertainty and financial turmoil create problems in certain parts of the financial markets. the fact that central banks take measures to ensure the targeted interest rate is at the right level may appear reasonable. similarly, we can observe that several central banks see arguments in favour of also influencing interest rates with a slightly longer duration. but potential measures must be balanced against the risk that the interbank market will cease functioning more quickly if there are signs of financial turmoil in the future. there is also a risk that a temporary extension of the collateral a central bank accepts can reduce the banks ’ incentives to hold sufficient amounts of what are normally considered eligible assets. if the central bank takes over some of the functions of the shortest interbank market, there is also a risk that banks which are essentially creditworthy will suffer liquidity problems as the access to short - term financing in the interbank market will disappear. although there is still the possibility to borrow from the central bank, collateral is required, while the interbank market usually provides loans without collateral. even though we have not needed to take a stand in these considerations in an emergency situation, we do of course discuss the issues and monitor developments closely. conclusion the financial turmoil has meant that several central banks have had problems stabilising the overnight rate at the target levels. the uncertainty has also contributed at times to difficulties for some banks in obtaining funding on the interbank market. several central banks have therefore taken measures beyond the normal to stabilise the overnight rate and to reduce the pressure on the slightly longer interbank rates. in sweden there has been no reason to take any extraordinary measures. the swedish interbank market has on the whole functioned smoothly. this is partly because swedish banks have not to any great extent been exposed to the us subprime market, and we have not seen any distrust of swedish banks. ultimately, it is a question of a broad view that swedish banks do not have problems. further, there is no incentive for swedish banks to invest in the riksbank ’ s standing facilities instead of on the overnight market. one reason is that our monetary policy steering system is constructed so that it would immediately be more costly for the banks, unlike systems with