clarification in 1999 made it clear that the practical formulation of monetary policy takes account of developments in the real economy. according to the clarification there may be reason for the riksbank to deviate from the target if inflation is being affected by a temporary shock that will not fully dissipate during the coming two - year period but that is nonetheless not deemed to have any lasting influence on inflation developments. another reason is when a bigger shock makes a return to the target one to two years ahead associated with excessive undesirable effects on the real economy. there are many examples in recent years of when we have taken such factors into account. at the turn of the year 2002 - 2003, for example, rising energy prices were pushing up inflation quickly. but since the high energy prices were expected to gradually fall back entirely we saw them as temporary and decided to leave the repo rate unchanged. when the current regime of inflation targeting was established in the early 1990s it had been preceded by a long period of high, fluctuating inflation in both sweden and other countries. many countries around the world experienced a similar shift in regime around this time. partly as a result of this, international inflation fell sharply during the 1990s, from about 30 per cent to below 4 per cent a year on average. 4 the inflation targeting regime and its practical application has been underpinned by the conviction that high, variable inflation is bad for the economy. now we are living in a world with very weak price increases, particularly for manufactured goods. is there anything in the current circumstances that could motivate a change in the riksbank ’ s thinking? the integration of china's and india's large, fastgrowing economies into the world economy will most likely affect world growth and inflation for a long inflation targeting – theory and practice ", sveriges riksbank quarterly review 4, 13 - 42, for a similar discussion that is linked to the monetary policy framework in sweden. read more about this in, for example, palmqvist s. & stromberg l. ( 2004 ), " households ’ inflation opinions – a tale of two surveys " in sveriges riksbank economic review 4, 24 - 43. see rogoff, k. ( 2003 ), " disinflation : an unsung benefit of globalization? " time. globalisation has been given a powerful push forward. even though setbacks are possible, it is reasonable to believe that the

kristina persson : monetary policy in a low - inflation economy speech by ms kristina persson, deputy governor of sveriges riksbank, at the stockholm strand rotary club, stockholm, 18 february 2005. the references for the speech can be found on the sveriges riksbank ’ s website. * * * introduction thank you for the invitation to take part in this morning seminar. i intend to begin by giving my views on the current prospects for the economy and inflation, including the risks associated with, among other things, the unwinding of the present global imbalances. i will do so against the background of the minutes from this year ’ s first monetary policy meeting, which were published last week and which gave an account of the executive board ’ s discussion on 27 january. then i will discuss the riksbank ’ s remit, different ways to conduct monetary policy and the possible implications of the low inflation rate for future monetary policy. the current monetary policy situation since christmas the news flow has been dominated by the huge tidal wave disaster that hit the countries in the indian ocean. despite the scale and extent of the disaster the consequences for the world economy will probably be very small. that at least has been the conclusion from the different international meetings that have taken place after christmas. international economic activity is thus expected to continue to strengthen and resource utilisation in the world economy to become increasingly higher in the coming years. inflation has risen slightly in most countries, owing mainly to the increasing oil price. but excluding oil, inflation has not risen at the same rate. there are plenty of spare resources in several of the biggest economies, and in recent years competition has toughened in many industries. as a result, international inflation is forecast on the whole to be relatively moderate in the coming years. the economic situation in the us and the euro area in the us the economic situation is continuing to improve. in the fourth quarter last year gdp in the us rose by 0. 8 per cent compared with the previous quarter, partly due to a sharp increase in investment. this reflects a benign investment climate in the us with historically high profits and optimism among firms. indicators of growth prospects for the fourth quarter provide a positive picture of the activity level in the us economy. as resource utilisation has picked up the federal reserve has raised its key policy rate from 1 per cent to 2. 5 per cent. many factors suggest that we can expect the tightening to continue in the spring. inflation is estimated