through the purchase and sale of foreign currency. given the conditions that prevailed in 1997, there was clearly a danger of overheating which led the central bank to pursue a tight monetary policy. after the bank had raised money market rates in the fall of 1996 the differential between domestic money market rates and those in main trading partner countries widened to 3 percentage points. this was a necessary response to the growing uncertainty about the outcome of the pending wage negotiations, and it led to an acceptable equilibrium for some time. however, some currency outflow was experienced during the first weeks of 1997 until the outline of the wage settlements began to emerge. the wage settlements eased fears of rising inflation and increased confidence in a stable exchange rate. the central bank, nevertheless, maintained unchanged interest rates, and considerable currency inflow took place through july. international reserves grew to a peak of 36. 2 billion kronur at the end of july, up 5. 2 billion kronur from the beginning of the year despite the repayment of some of the treasury ’ s foreign debt. the central bank thought it desirable that the exchange rate of the krona should strengthen somewhat to lessen pressures on the domestic market and dampen inflation pressures. the bank ’ s measures undoubtedly contributed to lower inflation than expected. monetary developments changed course at the beginning of august. currency outflow commenced anew and bond market yields began to rise. this change was the result of increased purchases of foreign securities by residents, a stop in the relending of foreign loans and an increase in general bank lending. the differential between domestic and foreign money market rates had also narrowed because of interest rate rises in some neighbouring countries. when it had become clear that this was not a temporary situation, the central bank responded by raising interest rates by 0. 3 percent in mid - november. the interest rate had an immediate impact, the exchange rate of the krona strengthened and the currency outflow stopped. at the end of the year, the exchange rate index was 0. 9 percent below the central rate of the fluctuation range after having strengthened on the whole by 1. 4 percent in the course of the year. international reserves stood at 27. 8 billion kronur at year - end, down 3 billion kronur from a year earlier. reserves are now about 27 billion kronur. the central bank ’ s short - term foreign liabilities were close to zero at year - end, where they in fact remain. the bond market bond market reforms

coincidence whether imports for power - intensive industrial projects were recorded in 1997 or 1998. more appear to have been recorded in 1998 than expected. merchandise exports grew by less than 2 percent in volume terms, which is not a particularly good performance. the growth of exports is in fact too slow in relation to, for example, the expansion of world trade. thus, it can be said that slow export growth is as much the cause of the current account deficit as the expansion of domestic demand. business profitability and the labour market the external conditions of the economy in 1997 were largely unchanged from 1996, and were on the whole favourable. business profitability seems to have been fairly good, although not as favourable as in 1996, because of the wage increases at the beginning of the year and large depreciation and interest charges related to the high levels of investment in recent years, especially in the fisheries. the labour market situation improved further and unemployment declined to 3. 9 percent on average, having come down from a peak of 5 percent in 1995. real wages grew by 5. 7 percent in the course of 1997, and were at year - end at their highest level since 1989. prices inflation remained subdued in 1997, or 2. 2 percent in the course of the year, and 1. 8 percent on average between 1996 and 1997. the central bank had, in the wake of the wage settlements, forecast somewhat higher inflation but wage increases did not translate into price increases to the extent shown by past experience. productivity growth was higher than expected and the rise in import prices lower. in addition, the central bank ’ s measures restrained price increases, as i will discuss in greater detail shortly. in january, the bank forecast that inflation would average 2. 6 percent between 1997 and 1998, and 2. 3 percent in the course of the year. it seems clear that inflation during the first quarter of this year has been lower than expected in january. government finances in 1997, the treasury recorded a welcome surplus of 1. 3 billion kronur on a cash basis despite tax cuts, a rise in the wage bill and special interest payments associated with government bond redemptions. in order to compare the outcome with the budget it is necessary to exclude the special interest payments of 3. 5 billion kronur. thus adjusted, the treasury ’ s surplus was 4. 7 billion kronur. a treasury surplus had not been recorded since 1984. on an accrual basis, which includes accrued interest and pension liabilities,