bank, in less than a year. this episode will be an important lesson for those who wish to study the way governments and central banks should cooperate to bring stability, in the face of any instability in the banking sector. it also confirmed the validity of an important annotation in exter ’ s report. let me quote once again from the first chapter of his report : “ many of its ( central bank ’ s ) powers may go unused for long periods, because they are designed for particular situations, some of which may never arise. others are intended for use only in crises or to forestall a crisis, but prudence dictates that they be included now, so that they will be at hand in case of need. … ”. case study 4 : the creation of our present day “ virtuous cycle ” mr. chairman, i would like to now place before you, yet another significant example of harmonization between the monetary and fiscal policies, which led to the creation of a new “ virtuous cycle ” in relation to inflation, interest rates, investor confidence and sustained growth, in our country. as we are all aware, sri lanka had been long trapped in a “ vicious cycle ” of high fiscal deficits leading to high inflation ; high inflation leading to high interest rates ; high interest rates leading to low investor confidence ; low investor confidence leading to sluggish investment ; sluggish investment leading to low growth ; low growth leading to high debt ; and high debt once again leading to high fiscal deficits. this was the vicious cycle that we had been trapped, for more than 5 decades since independence. it is true that we have had one - off spurts of high growth or short periods of low inflation at various times in our history. however, we have to acknowledge that, other than in 2010 and 2011, we have never had over 8 % growth in consecutive years, or, for that matter, been even able to record an average growth of over 5 % over a 5 year period, prior to 2006! at the same time, other than the period february 2009, till now, sri lanka had never enjoyed a period of even two continuous years of single digit inflation, and, believe it or not, our level of average inflation was over 12 % prior to that! what was worse was that there was almost a sense of acceptance of such performance among many officials of both the mof and cb, who harboured the internal view that it may be our country

later, although just when is not clear, swedish exports will pick up this time as well. but the terrorist attacks have probably postponed the recovery and perhaps even accentuated the slowdown in the short run. it is important to keep an eye on the exchange rate as well as economic activity. on the domestic scene there are some bright spots. household disposable income, for instance, looks like rising strongly next year. contributory factors are a falling rate of inflation, fiscal stimuli and, not least, a labour market with no dramatic changes, at least at present. moreover, real interest rates are low. all this probably reduces the risk of private consumption continuing to weaken. at the same time there are many indications that the reduction of equity wealth in recent years has had an appreciable negative effect on purchases of consumer durables. so there are good reasons for supposing that it will be some time before households are again prepared to invest in new cars and other capital goods. consumption may therefore remain weak for somewhat longer. in other words, there is a risk that, despite the weak exchange rate and low real interest rates, the swedish economy will recover more slowly than expected earlier. to sum up, a number of factors point to a gradual economic recovery in sweden in the course of next year. this picture could still be changed by many things. one factor is the terrorist attacks and their aftermath. another is, of course, the extent of the economic adjustment that occurs in the united states as a consequence of the imbalances that have accumulated in recent years. monetary policy swedish monetary policy in the past year has had to consider an economic slowdown on the one hand and a depreciating currency on the other. gdp slowed from rates of 3 to 4 per cent in recent years to between 1 and 1. 5 per cent in the first half of this year. at the same time, since last year the krona has weakened around 15 per cent. these two forces have pulled the riksbank ’ s inflation forecasts in slightly different directions at different times in the past year. roughly speaking, with a given potential growth rate, inflation tends to be subdued when economic activity slackens, while a weak exchange rate pulls in the opposite direction and may lead to higher price increases : directly through rising import prices and indirectly by stimulating activity via export production. in addition, sudden exchange rate movements can affect inflation expectations. here i should like to be precise and a little formal and say