increased considerably, which contributed to pushing up inflation. it is also an example of a supply side shock, as these prices are set in the world market. swedish monetary policy cannot affect them. but at the same time, domestic cost pressures were relatively high. productivity growth had slowed down, while wage costs were rising. we had experienced a long period of growth and the labour market had begun to tighten. growth was still good, but we saw a slowdown coming, although it appeared that it might be fairly mild. we were facing a situation where the risk that high energy and food price increases would spread to other prices must be weighed against the risk of a weak real economy. there was much talk of the risk of stagflation, that is, a combination of an economic slowdown and rising inflation. we faced a situation in which reaching a decision became ever more difficult. this became clear when we executive board members made slightly different assessments in summer and early autumn 2008 of what kind of interest rate policy was required. however, the economic downturn was much quicker and deeper than we had expected, partly as a result of the financial crisis which came to affect us more tangibly in the autumn. this was unfortunate for the economy, but it simplified our decision - making. we could see ahead of us that inflation would be far below the target for a period of time, and we wanted to avoid this period from being a long one. we have been able to cut the repo rate by 3. 75 percentage points in less than six months, which means that the repo rate is now at a historically low level. our forecasts show a substantial fall in demand and the lower interest rate policy is intended to contribute to softening the fall. when the circumstances have suddenly changed, monetary policy has been rapidly adapted to the new situation. the two cases i have taken up show the flexibility inherent in our monetary policy and which we have made good use of. what is the driving force behind inflation? a fundamental question as monetary policy ’ s ability to influence inflation and ultimately economic developments depends on the type of shock to which the economy is subjected, we must analyse the driving forces behind inflation. 5 when inflation is governed by supply factors that push up inflation, as in 2007 - 2008 when for instance energy prices rose, the initial effect cannot be prevented by monetary policy. when inflation became too low in relation to the target around 2005, this was largely because productivity rose more than expected. this is essentially

barbro wickman - parak : what can monetary policy achieve? speech by ms barbro wickman - parak, deputy governor of the sveriges riksbank, at a meeting, karlstad, 27 march 2009. * * * economic policy can be divided up into two areas : fiscal policy and monetary policy. in sweden and all other countries with independent central banks, there is as we all know a distinct difference between these two policy areas. the government is responsible for fiscal policy and the central bank for monetary policy. the central bank is not allowed to receive instructions from any other party when carrying out its monetary policy tasks – it is to conduct its monetary policy in an independent manner. so what is the range of the policy area delegated to an independent central bank ; that is, what can we expect a central bank to be able to achieve? this question is the theme of my speech today. economic policy ultimately concerns creating the best possible conditions for long - term growth and thereby a high level of welfare for the population. the given limit for growth is set by developments in the labour force and in productivity. to attain long - term growth the policies must be aimed at, for instance, educating the labour force, creating an incentive structure that stimulates people to work, creating a good innovation climate that promotes technological developments and so on. this is all common knowledge, but may be worth saying sometimes. and the reason i am doing so now is that it may be a good starting point for distinguishing what monetary policy may achieve in the short and long run. we can note already that the policy areas i recently mentioned concern politics in a broad sense and not monetary policy. it is thus not monetary policy that can affect these most fundamental conditions for long - term growth. one illustration of monetary policy ’ s limited potential to affect employment in the long term is the disparate regional developments in one and the same country. in sweden, for instance, there are large regional differences in employment levels, despite monetary policy being the same for all regions. these differences appear to be lasting, which might indicate that they are due to underlying, structural factors that are beyond the control of monetary policy. however, monetary policy can affect the conditions for long - term growth on one very essential point, namely by keeping inflation close to the target and inflation expectations anchored around the target. if inflation deviates from the target the riksbank ’ s aim is normally to bring it back on target within a couple of years