expected by us analysts. monetary policy must be based on forecasts of inflation and resource utilisation. if monetary policy is based on an overly optimistic assessment of the interplay between growth and inflation, it can lead to monetary policy becoming overly expansive. if inflation expectations have become more slow moving, it could mean that there is time for considerable imbalances to build up before policy has an impact in the form of higher inflation. examples of this are japan in the 1980s, the usa in 1927 - 29 and again in the 1990s. the example from japan indicates that even if inflation does not rise during the forecast period with which monetary works, it is important to take a broader outlook both throughout the entire economy and further forward in time, and to envisage the risks that could exist with regard to financial stability. in japan the cost of borrowing was very low during a long period of time to borrow money to invest in shares and property. as the productivity of the economy increased, confidence in the future grew and this made both investors and credit institutions more willing to take risks. the result was that asset prices were pushed up. a raise in the interest rate in this type of situation, where over - optimism was rife and both inflation and interest rates were low, could have meant that investors, property buyers and credit institutions would have acted rather more cautiously than if the interest rate had remained unchanged at a low rate and thus at least subdued the price bubble somewhat. the costs to society of waiting too long to change the direction for monetary policy can be high if imbalances are allowed to grow and the fall in production can be drastic when the imbalances are corrected. it is therefore important that monetary policy should act in a preventive manner and that great vigilance is exercised with regard to the temperature of the entire economy, both the real and the financial parts. let us return, after this outlook, to our own, calmer circumstances. low, stable inflation expectations cannot be used in all situations as an argument in favour of retaining monetary policy unchanged. it could be possible that the expectations are based on the general public assuming that the riksbank will act if and when required. the fact that inflation expectations remain stable could then reflect expectations of future monetary policy. if these expectations are not fulfilled, then inflation expectations, and later on the rate of price increase, will rise. the example from japan also shows that it is not certain that inflationary pressure will be visible in cpi inflation ; sometimes

gives mixed signals. open unemployment rose somewhat between december 2001 and january this year. employment levelled off during the second half of last year, but the increase was still 80, 000 persons, between 2000 and 2001. wage rises were slightly higher than expected last year, despite weaker economic activity. however, developments on the labour market are divided in two parts. employment in the manufacturing industry has fallen since the beginning of last year, while it is only now possible to detect a slowdown in the services sectors. similarly, the number of redundancy notices has been highest in the manufacturing industry. in the public sector, healthcare and welfare, there have been no notices of redundancy and the number of new vacancies registered has increased. the fact that the weak growth in the manufacturing industry has not spread to the private and public services sectors is probably due to the expansive economic policy. forward - looking economic indicators, such as confidence indicators for households and companies, imply that the downturn in activity is abating and that developments are beginning to stabilise. with regard to prices, inflation increased slightly more than expected in 2001. this can be partly explained by unexpected price increases on, for instance, fruit and vegetables ; the price of these product groups will probably continue to increase slightly more than expected in the short term. imported inflation has increased more than expected in both the producer and consumer areas, which could be due to the exchange rate ’ s effect on prices being slightly higher than assumed. however, price increases have also been broader and higher than expected for other goods and services. my view of the current situation so how do i assess the situation in which we find ourselves today? firstly, i feel that confidence in the future and willingness to take risks appear to have recovered from the shock of 11 september. but what will happen to inflation? there are three reasons why inflation should fall this year. the first is that growth in demand and utilisation of resources were both lower than expected last year, which subdues price pressure for the near future. the second is that inflation expectations are disposed towards a decline in inflation, according to recent surveys. and the third is that the krona has appreciated slightly, which means a lower risk of imported inflation. on top of this, the effects of last year ’ s price rises on certain goods and services, including food and energy, will gradually abate. however, there is also a risk that the price rises will not abate on their own.