interest rate paths can be used to illustrate the choices facing monetary policy. let me use the riksbank ’ s interest rate decision in december 2004 as an example. on that occasion we left the rate unchanged despite the fact that inflation was forecast to be below our target of 2 per cent during the greater part of the next two years. with inflation forecast to be so low during such a large part of the forecast period it would have been possible to justify a further rate cut. but there were also arguments in the opposite direction. the most important was that demand was already growing markedly faster than the economy was deemed capable of sustaining in the long run. the vigorous growth was anticipated to continue and so it wasn ’ t weak demand that was causing the low inflation. instead, the low inflation was being caused by unexpectedly high productivity and unexpectedly low price increases for imported goods, something that in itself could be expected to further stimulate growth in the period ahead. an additional factor was that the repo rate was already at an unusually low level, which could partly explain the increase in households ’ debt burden and the continued rise in housing prices. even though debt levels were not deemed to be a threat to financial stability, another rate cut could have further fuelled house price inflation and indebtedness. that in turn could have given rise to future problems when monetary policy eventually would most likely have to be tightened. none of these arguments in themselves were the key factor in deciding to leave the repo rate unchanged, but taken together they indicated nevertheless the need for a certain measure of caution. in this kind of situation it can be interesting to consider how different future paths for the interest rate can be expected to affect both the real economy and inflation. figure 6 shows resource utilisation in two different cases : one based on an unchanged repo rate and another on the implied forward rates that applied during the autumn. at that time the implied forward rates were indicating that the repo rate would be raised very shortly and that it would then rise to levels around 4. 5 per cent in the longer term. resource utilisation picks up in both cases, turning positive after about a year. but if the repo rate is raised according to the implied forward rate at the time, resource utilisation drops, turning negative again during 2007, whereas it remains positive throughout the whole period covered by the example if the rate is held constant. the situation also differs somewhat between the two alternatives when it comes to inflation ( see figure 7 )

number of people in employment is the highest on record. and unemployment has fallen from its most recent peak of 10½ % on a claimant count basis at the turn of 1992 / 93 to the present rate of 3. 7 %. that is the lowest for 25 years in the uk as a whole, and just about the lowest in nearly every region. this is not just past history. having come through the global economic slowdown a year or two ago, the economy as a whole is now again growing at well above trend, with inflation a bit below target ; and the broad prospect for the next couple of years - on most forecasts, is for continuing relatively strong growth with relatively high employment and relatively low inflation. our economic progress - and the common approach to economic management that underlies it and which we share with our european partners - provides, in my view, a firm foundation for a continuing positive and constructive relationship between the uk and other members of the european union, whether or not they are members of the eurozone. that of course is in the economic interest of all sides. just as we benefit from a stable and prosperous europe, so too the continental european interest lies in a stable and prosperous uk. and that mutual self - interest above all is the thing we all need to hold on to.