My interpretation is that both Swedish and German interest rates have been low because risk premiums have been under pressure and difficult to determine, which has made it difficult to interpret the interest rate levels as an expression of monetary policy expectations. However, the risk premiums largely cancel each other out when interest rate differentials are studied and they therefore manage to indicate shifts in the relative monetary policy expectations rather well. This interpretation thus means that monetary policy expectations in Sweden have shifted upwards relative to those in the euro area, which in turn reflects the fact that the Swedish economy has developed surprisingly strongly in comparison with the economy in the euro area. The link between the krona exchange rate and interest rate differentials should therefore not be over-interpreted. For example, the krona has strengthened more than motivated by the increased in the interest rate differential. This could be because the krona weakened dramatically during the crisis and had not still not fully recovered at the beginning of the summer. Since then, the krona has continued to appreciate as the willingness to invest in krona assets has increased. BIS central bankers’ speeches  5  It is important to note that the analysis above refers to the development of the krona in the past and says little about how the krona will develop in the future. Interest rate differentials primarily influence the krona exchange rate when they change because the market agents revise their view of interest rates in Sweden or abroad.

I think this is a good thing, even though in my view repo-rate increases are already justified for other reasons and this is not a necessary justification. Unfortunately, our models are not very good at determining the significance of financial imbalances for fluctuations in economic activity. A lot of exciting development work remains to be done in this respect. The fact that the effects of financial imbalances on the macro economy may lie beyond the forecast horizons that we work with in monetary policy must not mean that we ignore them. We must monitor the development of housing prices and household indebtedness carefully and to the best of our ability analyse any indications that threatening financial imbalances are building up and take these into account in our monetary policy considerations. What characterises a well-balanced monetary policy? Ultimately, a monetary policymaker is forced to take a stance on different courses of action for monetary policy on the basis of difficult assessments of economic trends. Are there then any guidelines that can be of help? And what is it really that characterises a well-balanced monetary policy? It is normally a question of finding an appropriate balance between stabilising inflation around the inflation target and stabilising the real economy. It is difficult to translate what can be considered a well-balanced monetary policy in any given situation into precise and practical monetary policy. The intention behind stabilising inflation is relatively easy to understand, but the significance of stabilising the real economy is not so clear.