The Riksbank, along with other official observers and market forecasters, has revised its assessments in the light of the increasingly widespread effects of the international crisis. •  Last autumn most observers counted on a strong economic trend, both in Sweden and in the rest of the world. The crisis that had erupted in Southeast Asia was expected to lead at most to a welcome easing of international price pressure. In the Swedish economy, some indicators last autumn pointed to rising inflationary pressure. In particular, a gradual increase in capacity utilisation was judged to lead in time to inflation above the Riksbank’s target. Inflation expectations, moreover, were tending to move up, having previously stabilised after a falling trend for a number of years. In the December Report it was judged that inflation would exceed the target in 1999. The Riksbank raised the repo rate 0.25 percentage points. At the same time, the Riksbank underscored that, due to uncertainties in the assessment, the outcome might differ from the main scenario. On the one hand, an exacerbation of the crisis in Asia could result in weaker inflationary pressure; on the other, there were risks that high wage increases and weak productivity growth would fuel the rate of inflation. These two alternative scenarios were judged to be equally probable. •  During the spring the picture of inflation changed by degrees. In the March Report, inflation prospects had altered somewhat in connection with the mounting crisis in Asia and low import prices.

It is therefore imperative that policymakers in the region consider the risks of a possible turnaround of this positive cycle, and carefully monitor fiscal spending. Expenditures should be established in coherence with the permanent levels of fiscal revenues so as to ensure that, once the current boom is over, public finances are not depleted, and public spending is shielded from commodity price fluctuations. Although the region’s economies have made significant progress regarding integration to the global markets, they are still vulnerable to international financial volatilities. A yellow light was turned on by the episodes of May-June of this year, when the market correction hit hard on some currency and stock exchanges of emerging economies. The main challenge for our region at this point is to take advantage of the opportunities provided by the actual international situation by making progress in the design of policy framework and institutions so as to consolidate macroeconomic stability, and strengthen the conditions necessary to achieve high and sustainable growth rates. This is the best strategy to prevent future crises. Main opportunities are in continuing advancing in: •  Macroeconomic policies oriented toward making the economy more resilient to external shocks. This requires a credible and flexible policy framework, with prudent and consistent monetary, exchange rate, and fiscal policies. In this direction, progress in fiscal accountability, and the adoption of inflation-targeting monetary frameworks alongside more exchange rate flexibility have left the economies of the region better equipped to participate in the global economy.