later, although just when is not clear, swedish exports will pick up this time as well. but the terrorist attacks have probably postponed the recovery and perhaps even accentuated the slowdown in the short run. it is important to keep an eye on the exchange rate as well as economic activity. on the domestic scene there are some bright spots. household disposable income, for instance, looks like rising strongly next year. contributory factors are a falling rate of inflation, fiscal stimuli and, not least, a labour market with no dramatic changes, at least at present. moreover, real interest rates are low. all this probably reduces the risk of private consumption continuing to weaken. at the same time there are many indications that the reduction of equity wealth in recent years has had an appreciable negative effect on purchases of consumer durables. so there are good reasons for supposing that it will be some time before households are again prepared to invest in new cars and other capital goods. consumption may therefore remain weak for somewhat longer. in other words, there is a risk that, despite the weak exchange rate and low real interest rates, the swedish economy will recover more slowly than expected earlier. to sum up, a number of factors point to a gradual economic recovery in sweden in the course of next year. this picture could still be changed by many things. one factor is the terrorist attacks and their aftermath. another is, of course, the extent of the economic adjustment that occurs in the united states as a consequence of the imbalances that have accumulated in recent years. monetary policy swedish monetary policy in the past year has had to consider an economic slowdown on the one hand and a depreciating currency on the other. gdp slowed from rates of 3 to 4 per cent in recent years to between 1 and 1. 5 per cent in the first half of this year. at the same time, since last year the krona has weakened around 15 per cent. these two forces have pulled the riksbank ’ s inflation forecasts in slightly different directions at different times in the past year. roughly speaking, with a given potential growth rate, inflation tends to be subdued when economic activity slackens, while a weak exchange rate pulls in the opposite direction and may lead to higher price increases : directly through rising import prices and indirectly by stimulating activity via export production. in addition, sudden exchange rate movements can affect inflation expectations. here i should like to be precise and a little formal and say

efficient risk management framework and the adequacy of resources to mitigate risk. against this background, therefore, basle ii is synonymous with good risk management, not only of the core risk of credit default, but of a wider range of risks such as market risk and operational risk in pillar i. together with the mutually reinforcing pillars ii and iii, of regulatory review and market discipline, basle ii represents a formidable tool to insulate banks against inherent risks in the highly leveraged business of banking. in this process, we must be mindful of the fact that basle ii has been built on the experiences and risk parameters of developed, sophisticated economies. through customization to suit conditions and markets in emerging economies, which have fundamentally different characteristics, the principles of basel ii should be appropriately adapted to suit such conditions. the “ one size fits all ” solution of basle i will not suit the complexities of basle ii. the markets in which we operate have their own peculiarities and their own cultures. promoting international best practice in such a culture is, indeed, a challenge which demands a fundamental change in credit cultures, attitudes, and policies. the will to change is important and in the case of banking institutions, has to be mandated, if it is to be in the best interests of the major stakeholders, the depositors. full implementation of basel ii is, indeed, demanding for banking institutions and regulators alike. capacity building is an imperative on both sides, as is the framework for good risk management built on risk models. the supervisory capacity to assess and validate these models must be enhanced and developed. the magnitude of the investment in technology by the banks must be justified in a business sense. we must ensure that the cost of compliance does not outweigh the benefits from basle ii. emerging market economies are very vulnerable to the reputational risk of non - compliance. therefore we must take one step at a time. the infrastructure for compliance - legal, accounting and market - must be established and is an essential pre - requisite which underlies the success of these initiatives. the implications on the several sub sectors of our economy from basle ii will have to be examined carefully with regard to access to finance and the pricing of risk. uneven playing fields may arise as a result of the internationally active foreign banks adopting more advanced approaches, thereby improving their competitiveness over their local counterparts. will the models developed by the foreign banks be relevant for the risks in our markets? these are