better functioning financial markets as a result of the changes in economic policy and the improvements in regulatory frameworks and supervision that i mentioned earlier may have contributed to this. if so, the level of indebtedness in the corporate and household sectors should not comprise such a great threat to economic activity in the coming years as many have feared, including the riksbank in a number of inflation reports. in sweden, the decline in economic activity has not affected capacity utilisation and unemployment to the same extent as in previous cases in the economy. this means that the upward turn will be from a relatively high level of resource utilisation in the economy. low interest rates, a weak krona and a very expansive fiscal policy have been contributing factors here. one consequence of the high level of resource utilisation could be the unexpectedly high inflation rate registered recently. earlier price increases on certain product groups are assumed to be temporary, which would mean that inflation should fall this year. however, price rises in the services sector, for instance, probably reflect higher labour costs. a number of my colleagues have expressed concern over future inflation and i must say that i share their concern. the fact that the international upturn in economic activity is taking place after a very brief and moderate decline means that the economic upturn is not expected to be as strong as earlier upturns. for sweden, this means that exports are increasing, but that growth is primarily expected to come from domestic demand, in particular in the services sector. in my opinion, this increases the risk that domestically - oriented companies with pressurised profit margins will continue to compensate themselves for cost increases by raising prices. this is roughly how the picture looks as the executive board of the riksbank gathers on monday 18 march to discuss the economic situation and monetary policy. we will also have as a basis for our decision a completely fresh inflation report, which will be published on the following day.

one another both within and between countries could lead to considerable contagion effects when there is a disturbance in one part of the system. to summarise ; the risks of large financial imbalances building up in economies have probably declined over the past decade as a result of more predictable economic policy. regulations and risk management systems have also improved. at the same time, the complexity of the financial instruments and the opportunities for extensive positions off the balance sheets have increased the difficulty in assessing future profits and risks in companies. meanwhile, increased saving and financing in market - listed instruments have made households and companies more dependent on the safe and efficient functioning of the financial markets. this could mean that the effects of disturbances from the financial system on the real economy could increase in the long term if regulatory frameworks and supervision are not adapted sufficiently rapidly. can we live with large imbalances? when share prices plummeted almost two years ago and when uncertainty increased following the terrorist attack in september last year, there were fears that expectations for the future would be revised down so strongly that households'willingness to consume and companies willingness to invest would decline drastically. the fears concerned the us economy in particular, but the uncertainty was also expected to affect the rest of the world. the high level of indebtedness built up during the economic upturn in many countries significantly increased this risk. positive expectations of the future had increased companies'financing needs for investment. at the same time, a bright picture painted of the future and an increase in wealth had stimulated households'consumption and increased their investment in housing. it was easy to imagine a risk scenario where household sector demand declined so rapidly that heavily indebted companies went bankrupt, where unemployment rose drastically and where banks an other lenders suffered extensive loan losses. this negative spiral could continue with further falls in share prices and household wealth and rising credit risk premiums would make lending more expensive. if this negative sequence of events were not broken, high loan losses could eventually lead to bank crises and credit crunches, which would contribute further to the downward spiral. a credit boom, large increases in asset prices and a high rate of growth in investment, often concentrated on a particular sector, have been the factors preceding serious financial crises around the world. however, it is important to remember that neither a credit boom nor a large deficit on the current account need be interpreted as an accumulation of financial imbalances. if savings and investment decisions are based on realistic expectations of future growth and banks and