The resource-utilisation and inflation forecasts will fall below a sustainable level and the inflation target, respectively. The appropriate monetary-policy response under flexible inflation targeting is to lower the policy rate and the policy-rate path. This will stimulate the economy, moderate the nominal and real appreciation, and shift up the forecasts of inflation and resource utilisation towards the target and a sustainable level, respectively. In the new equilibrium, the currency has appreciated somewhat in real terms, the nominal and real interest rate will be lower, the tradable-goods sector may have contracted somewhat, and the nontradable-goods sector may have expanded somewhat. This is the monetary-policy response that I vote for when this situation arises for Sweden. Suppose that for some reason the central bank is not willing to accept the nominal and real appreciation of the currency. By lowering the domestic interest rate and the policy-rate path so as to keep the interest-rate differential and its forecast unchanged, the central bank could in principle maintain a fixed exchange rate and zero capital flow. But the lower nominal and real interest-rate paths are expansionary, and the inflation and resource-utilisation forecasts will shift up, above the inflation target and a sustainable level, respectively. The domestic economy is effectively importing the foreign economy’s monetary policy, which is too expansionary for the domestic economy. The increased growth and activity and the expectation that the central bank may eventually have to accept an appreciation may then still lead to a capital inflow, even though the interest-rate differential is unchanged.

All this generates a high level of uncertainty with regard to future developments in the global economy. Swiss economic outlook I will now look at economic developments in Switzerland. As expected, growth in Switzerland picked up somewhat in the first quarter, after having been relatively weak in the previous quarter. The rebound was mainly attributable to the upturn in business activity in manufacturing and the banking sector. On the demand side, exports of goods – which had still been declining in the previous quarter – and construction investment were the main growth drivers. Nevertheless, the capacity of the Swiss economy is still not fully utilised overall. Technical capacity utilisation in manufacturing remains considerably below its long-term average. Although employment was up in the first quarter, the unemployment rate remained unchanged. We expect the moderate recovery to continue in the coming quarters. For 2014, we anticipate that the growth rate will remain at around 2.0%. As we continue to see gradual improvement in the international environment, export demand is likely to rise. Over time, this should encourage corporate investment and stimulate demand for labour. The level of residential construction orders remains high. On the whole, however, we expect a considerable slowdown in the growth momentum of residential construction investment. In addition to global risks, the Swiss economy also faces uncertainty at home. In the past few weeks, the SNB’s delegates for regional economic relations asked companies to assess the impact of the popular initiative on curbing mass immigration on their business activity.