exactly what formulations are used in for example speeches and press releases. interest rates are by definition always uncertain let me take up some issues that are important to keep in mind when formulating forecasts for the repo rate. firstly, the interest rate path we present is a forecast and forecasts are, as we know, very uncertain. to illustrate this, the riksbank publishes uncertainty intervals, known as fan charts, around its interest rate forecasts and also its inflation and gdp forecasts ( figure 8 ). as you see, the uncertainty interval increases considerably in relation to the length of the time horizon. put simply, the probability of unexpected shocks arising in the economy that would lead to developments deviating from the forecasts increases when the time horizon is longer. in other words, it is not easy to make accurate forecasts of the development of the interest rate in the longer term. one means of illustrating this is to see how the implied forward rates have changed over time. figure 9 shows implied forward rates measured on a quarterly rate. expectations of the development of the repo rate have varied substantially over time when measured in this way. during the years the interest rate has gradually been cut, expectations according to implied forward rates have substantially overestimated the level of the repo rate. after the interest rate raises began one and a half years ago, there has rather been a tendency for the repo rate path to be slightly underestimated. as the economy is constantly exposed to unexpected shocks, it is not at all strange that forecasters revise their assessments. this applies to the major banks, the national institute of economic research, the ministry of finance and also to us at the riksbank and our interest rate forecasts. the major uncertainty means that we forecasters should be very cautious when making statements about the future, but this should not restrain us from saying how we think the future will look. secondly, it is difficult to determine what will be a normal level for the interest rate a couple of years ahead, that is, the interest rate that prevails in a normal phase of the business cycle. as we can see in the diagram, the paths for forward rates have flattened out and the view of what is a normal rate has gradually been revised downwards over time ( figure 9 ). the riksbank has stated that a normal level for the repo rate is probably somewhere in the interval 3. 5 to 5 per cent. but experiences show that the repo rate

how the market agents ’ expectations of interest rate developments changed after we had published our forecast in june. figure 10 shows the expectations of monetary policy that can be understood from the implied forward rates. the day prior to the decision the implied forward rates indicated that market agents had prices a level for the repo rate of 4. 0 per cent during the first quarter of 2008, that is, around the same as the main scenario later published by the riksbank. in the longer term the riksbank ’ s main scenario and implied forward rates differed. with effect from the middle of 2008 onwards, implied forward rates were above the new interest rate path published by the riksbank. the market information the commercial banks sent to their customers showed a similar picture. one can not, therefore, say that the riksbank ’ s june forecast on the whole contained abnormally large interest rate increases. why were the market reactions so strong? both the market information and pricing in the market thus indicated that analysts if anything were counting on a higher repo rate in the longer term than the forecast later published by the riksbank. nevertheless, the yield curve for implied forward rates rose by around 15 points over the entire period following the interest rate announcement on 20 june ( see figure 10 ). why were the market reactions so strong? firstly, international interest rates rose that day, which probably reinforced the rise in sweden. secondly, there are many signs that market agents had expected the riksbank to publish an interest rate path that was lower than the path it actually published. so despite the market analysts ’ own interest rate expectations being in line with the riksbank ’ s published interest rate path for the coming six months and higher further ahead, they were surprised by the riksbank ’ s upward revision of the interest rate path. one might ask why market agents ’ expectations of the riksbank ’ s interest rate path differed from their own forecasts for the repo rate. one interpretation is that they believed they had weighed together information on inflationary pressures in the economy in a different way than the riksbank. this is nothing strange in itself. assessing economic developments is not an exact science and different forecasters may very well draw different conclusions regarding the underlying inflationary pressure in the economy. but what surprises me, if this is the correct interpretation, is that the market nevertheless reacted so strongly to the assessment we made in june. another interpretation might be that some analysts thought the riksbank ’ s assessment