that world market prices are rising rapidly have for monetary policy? one must realise that these are examples of changes in relative prices. that is, the prices of commodities such as food and energy are rising in relation to the prices of, for instance, manufactured goods. for monetary policy it is important to note that the changes in relative prices are not in themselves inflation. inflation refers to a rise in the general price level, or the average of all prices. central banks cannot and should not counteract changes in relative prices. but what central banks can influence with monetary policy is the way inflation develops in the long term. some changes in relative prices can occur when inflation is low if the price increases on the goods that have become relatively more expensive is compensated by a weaker growth in prices of other goods. the same relative price change can be achieved when inflation is high, if the prices of all goods rise, but at different paces. if food commodities and oil prices soar, this means that companies'costs will rise and inflation will be pushed up. it is not possible to immediately counteract such strong inflationary impulses with monetary policy, as monetary policy works with a time lag. but what a central bank with an inflation target then faces is the task of ensuring that the rising food and energy prices do not result in permanently higher inflation expectations and second round effects in the form of demands for higher wages and prices of other goods. regardless of what happens to the relative prices, our task is – and this is important – to ensure that inflation is on average 2 per cent a couple of years ahead. … and we are only concerned with the lasting effects how should monetary policy respond to the rapid increases in food prices? this depends on whether the effects on inflation are assessed as temporary or lasting. monetary policy cannot respond to temporary upswings in inflation that can be expected to subside quickly, as monetary policy acts with a time lag. raising the interest rate to counteract temporary inflationary impulses could cause unnecessary costs. and here i mean costs in the form of production and employment falling too much. however, monetary policy should react to price impulses that would otherwise risk having lasting effects on inflation. as i have mentioned earlier, monetary policy both in sweden and abroad is facing a severe challenge. on the one hand, the fact that oil and food prices have recently shown a rapid upturn, both in the world market and in sweden, means that inflationary pressures have increased substantially. this implies that

capital and liquidity standards it is important to maintain appropriate capital and liquidity standards for large, complex firms to mitigate external shocks and the risks they pose to the economy. in particular, we need to maintain our focus on firms whose impairment would have significant negative consequences for the rest of the financial system. effective capital and liquidity standards help to limit these adverse consequences. at the same time, they work against conferring a competitive advantage to large banks from a perception that they may be too big to fail. accordingly, large financial firms have had to more than double their stock of high - quality capital since the crisis. prior to the financial crisis, large financial firms were not required to hold sufficient high - quality liquid assets to protect against runs, and, as a result, several would have failed if not for extraordinary government intervention. today, the liquidity buffers for large financial firms have dramatically improved in terms of both their size and quality. this is due in part to investors ’ demands, but also to the efforts by regulators and supervisors in the united states and abroad to develop appropriate liquidity standards for large banking institutions. some have argued that capital standards alone would be sufficient to mitigate the risks of failure. i am not convinced. as i just noted, the crisis clearly demonstrated the added importance of liquidity, as the firms that failed appeared to have been appropriately capitalized based on traditional regulatory metrics at the time. moreover, i strongly favor a system of capital and liquidity requirements that is harmonized on a global basis. some believe that the united states should no longer participate in international forums — such as the basel committee on banking supervision — that discuss and recommend minimum capital and liquidity standards for global banking institutions. the argument is made that these international bodies are dictating to and constraining the choices of the united states. that is simply not the case. the basel standards and other international efforts actually benefit the united states and its banks. in the preponderance of cases, agreements struck in these forums raise international standards closer to existing u. s. standards. establishing a more level playing field enhances the competitiveness of internationally active u. s. firms. it also makes the global financial system safer by ensuring that foreign banks are subject to appropriate standards that cover their global operations. this protects the u. s. households and businesses that transact with these banks in the united states and abroad. 2 also, it is important to note that the recommendations of these