are relatively sensitive to cyclical factors, i find this objective reasonable. besides the increased awareness of the importance of stable finances, the conditions for achieving sweden ’ s budget target have been improved by institutional changes in the budget process. sweden now has a budget process that is inherently more disciplined and can thereby contribute to maintaining sound finances. further steps are being taken to consolidate economic policy ’ s focus on stability. the independence which the riksbank already has in practice is to have a formal legal status as of next year. the monetary policy objective of price stability will be enshrined in law and the riksbank will be accountable for fulfilling it. this new riksbank legislation has already been approved once by the riksdag ( sweden ’ s parliament ) and the final decision is due this autumn. the reform is backed by five political parties, whose combined representation in the newly elected riksdag is over 80 per cent. according to the timetable for the new legislation, the riksdag ’ s final decision will be made sometime in the middle of november. it will be followed by the appointment of the riksbank ’ s new governing board, which will consist of eleven delegates. one of its major tasks will be to appoint the riksbank ’ s new executive board. this board will consist of six full - time members who will direct the riksbank and decide monetary policy as of january 1999. the present situation sweden ’ s monetary policy is conducted in a flexible exchange rate regime and has an explicit inflation target. we sometimes use the following simple rule of thumb to describe what governs our actions : if the overall assessment of inflation indicates that in one to two years time the rate of inflation will deviate from the 2 per cent target, then the repo rate should be adjusted accordingly. our approach is symmetrical, which means that it is equally important to avoid undershooting the target, as it is to avoid overshooting it. the riksbank ’ s appraisal of inflation up to the autumn of 2000 and the monetary policy conclusions that can be drawn from this are presented in the inflation report we published last week. in order to visualise the consequences for the future path of monetary policy, the report is based on the working assumption of an unchanged repo rate. as the swedish krona is judged to be undervalued at present, we also assume that the exchange rate follows a path that represents a gradual appreciation. the technical assumption of an

factor that probably also contributed was that there was a global saving surplus that meant there were large capital sums to be invested in the financial markets. this surplus pushed down the interest rate on risk - free assets. the combination of a lot of money to be invested and low risk - free interest rates contributed to an increase in the demand for assets that were profitable to invest in and led to an intensified hunt for high yield. this type of environment often inspires great inventiveness in the financial markets and many new financial instruments were also created. these were often complex and difficult to valuate correctly. but in the optimistic climate prevailing then – everything had gone so well for so long – it was nevertheless easy to sell them. those who invested in the new instruments disregarded, or failed to sufficiently understand, the risks that were “ inbuilt ” in them. the financial supervisory authorities and regulations also lagged behind this development. the problems in the international financial markets began to become more apparent as early as summer 2007. but the swedish economy and the swedish financial markets long appeared able to manage fairly well, despite the fact that the turbulence was having more and more effects on the world around us. of course, economic activity in sweden began to weaken as international economic activity declined, but this did not initially seem to entail any very serious downturn. however, when lehman brothers filed for bankruptcy in september 2008 the situation worsened dramatically. the confidence that had existed between financial institutions was shaken to its foundations when no one was certain who might be next in line to default on their payments. now the swedish financial markets were also hard hit and some sub - markets were practically at a standstill. the earlier expectations that the decline in economic activity would be fairly mild were replaced by a much more negative view of future developments, both in sweden and abroad. the lehman brothers crisis was also the prelude to a series of measures to stabilise the swedish financial markets. at the same time the riksbank took several rapid and resolute steps down the interest ladder to alleviate the effects of the crisis on economic activity. still sensitive but liquidity risk has declined the first phase of the crisis can be described as a liquidity and confidence crisis. no one trusted anyone else and very few were willing to lend money and take risks. the price of loans between the banks, interbank rates, also rose sharply. since the crisis started the central banks have lent large amounts to the banks. for example, the riks