rates ( slide 11 ). but all in all, it nevertheless appears as though the financial turbulence has so far not had as large repercussions on the financial markets as, for instance, the asia crisis in 1997 and the it crash in 2000. what effects can we expect on the swedish economy? perhaps the most important effect will arise in that growth in the united states will slow down when housing investments there fall and households consume less. the lower demand in the united states to some extent slows down international economic activity and there will be a slightly slower increase in swedish exports. the financial unrest will probably also contribute to swedish households maintain a certain level of precautionary saving. the fact that it costs more for banks to finance themselves may also contribute to households and companies sooner or later facing dearer loans. but there is considerable uncertainty over how extensive the effects of the financial unrest and the us housing market will finally be. we therefore analyse an alternative scenario with weaker international growth in our monetary policy report. prospects for inflation and interest rates we are expecting inflation to rise fairly sharply next year ( slide 12 ). this is partly connected to energy prices rising more rapidly. but inflation is rising even adjusted for energy prices. and the reasons are primarily that utilisation of the economy ’ s resources and cost pressures have increased. moreover, there are signs that food prices will increase rapidly over the coming year. inflation measured in terms of cpi will amount to around 3 per cent in 2008, according to our forecast. the measures of underlying inflation, cpix, which i recently mentioned, will in our opinion rise from the current level to around the target next year. the differences between the measures are largely due to households ’ mortgage expenditure increasing and to higher indirect costs. when the economic cycle enters a calmer phase, the cpix will fall back to levels around 2 per cent, while the cpi will remain slightly higher. this is our assessment, given that we raise the repo rate in the way i described earlier. the interest rate decision and our forecast for the interest rate to summarise, one can say that two forces are pulling in opposite directions ( slide 13 ). one is the stronger development here at home, and the other is a slightly weaker demand abroad. but even if we expect that slightly poorer international growth will have a dampening effect on the swedish economy, this is not sufficient to hold back the increased cost pressures. the interest rate therefore needs to be raised, and this was

have been reached at the end of last year. coincident and forward - looking indicators increasingly point to improvements in economic conditions. a similar picture is reflected in financial market expectations, especially those embedded in bond yields. the economic fundamentals of the euro area are sound and there are no major imbalances that would require a lengthy process of adjustment. the expectation of a recovery in the euro area in 2002 is furthermore supported by favourable financing conditions and by real disposable income benefiting from past and expected future declines in inflation. there is also increasing confirmation that economic activity outside the euro area is picking up, which should lead to a gradual strengthening of the external demand for euro area products and services. while the strength of the recovery remains uncertain, there are good reasons to expect a return of economic growth to levels in line with potential towards the end of the year. turning to short - term price developments, annual consumer price inflation picked up substantially in january. part of this increase was expected, as it related to base effects stemming from falling energy prices in early 2001 and to higher indirect taxes in some euro area countries. furthermore, the increase reflected a considerable rise in unprocessed food prices due to adverse weather conditions in parts of europe. part of the latter effect seems to have been reversed in the meantime, as preliminary data for february indicate. some increases have also been observed in oil prices and in the rate of growth of services prices in january. while there might have been an impact on specific service categories in january, overall there is no evidence that the euro cash changeover has had a significant upward effect on the average price level in the euro area or that the declining trend in annual inflation rates has been affected recently. in the coming months, the effects of past increases in energy and food prices should gradually subside and annual inflation rates should fall to below 2 %. the recent behaviour of producer prices also points in this direction. beyond that horizon, we expect little upward pressure on prices from aggregate demand and, barring unforeseen developments, inflation rates to be in line with price stability. however, the current favourable outlook for inflation fundamentally rests on the assumption of a continuation of wage moderation. as i already noted last month, there is some cause for concern with regard to ongoing wage negotiations. a continuation of wage moderation in the euro area is crucial not only to foster employment growth but also to support monetary policy in its task to maintain price stability. with regard to fiscal policy in the