mr backstrom reports on the swedish economy and monetary policy speech given by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, to the foreningssparbanken, in malmo on 16 february 2000. * * * the repo rate increases in order to understand why the riksbank has raised the repo rate in two steps from 2. 90 % last november to 3. 75 % less than a fortnight ago, it is necessary to consider the situation in 1998. the mood at that time, in the global economy as well as in sweden, was coloured by the asian crisis, the suspension of russian payments, the problems with the hedge fund long term capital management and falling stock - market prices. it was considered that in addition to direct problems, the financial crisis in the autumn of 1998 would have negative effects on real economic activity. forecasters altered their assessments and the prospects for global output and inflation were revised downwards. central banks around the world did likewise and the riksbank was no exception. instrumental rates were reduced in many countries. between the early summer of 1998 and the spring of 1999 the riksbank cut the repo rate by a total of 150 basis points, bringing it down from 4. 40 to 2. 90 %. the actions of central banks probably mitigated effects of the various shocks. they helped to check the signs of panicky behaviour in the market and then to restore a more optimistic assessment of the future. at the same time, the process displayed some ability to heal itself. all this has contributed to a rapid recovery in the global economy as well as in sweden. the current picture of many economies is thus very different from the uneasy situation that prevailed during 1998 and the early part of 1999. global growth prospects are appreciably better and the risks connected with inflation have changed. that is also why instrumental rates were adjusted upwards by many central banks last autumn and early this year. in principle it can be said that inflationary pressure follows a cyclical pattern. when economic activity is strong, demand growth tends to exceed the expansion of capacity and this normally leads in time to an accelerating rate of price and wage increases. conversely, weak demand may lead to the prospect of inflation being below the target one to two years ahead. as a rule, the repo rate should be raised in the former case and lowered in the latter. in this way, the rep

managing financial crises and alternative courses of action proliferate. politicians, whether or not they have the authority over the decision to intervene, want to satisfy themselves that intervention is justified and what is proposed is the right way forward. often the process of arriving at a consensus takes time and meanwhile the problem worsens and the effectiveness of the actions to be taken is eroded. i believe therefore that those responsible for the maintenance of monetary and financial stability should have the necessary emergency powers to do what is required independently and promptly. there is of course the need for transparency and accountability when exercising these powers to ensure appropriate checks and balances. at a time when many jurisdictions and international forums are reviewing the financial regulatory structure, the ability or inability of the financial authorities to take unusual action, independently and promptly, to protect the public interest should be addressed. my fourth and last issue is an involvement. this concerns the extent to which the authorities should be involved in the development of the financial infrastructure. i am sure you are aware of the huge amount of public money spent in all jurisdictions in the development of the physical infrastructure, building highways, bridges and airports to take people and goods from one place to another safely and efficiently, thus facilitating the conduct of economic activities for the benefit of all. authorities, however, seem to devote only disproportionately small amounts of resources to the development of the financial infrastructure to move money and financial instruments from one entity to another safely and efficiently for the purpose of enhancing financial efficiency that promotes economic prosperity. to some extent, the development of the financial infrastructure can be left to the market, with swift being a sterling example of private sector initiative in this area. but many of the important elements of the financial infrastructure are public goods, the provision of which, in a form that serves the public interest best, may not be financially viable for the private sector. furthermore, the conflict i mentioned earlier often comes in, affecting the willingness or the enthusiasm of the financial intermediaries to develop and use a financial infrastructure that promotes financial efficiency. i believe this is one of the main reasons why x in t + x in the settlement of some financial transitions is still a number other than zero, or why t + x is still not replaced by rtgs dvp even though the technology to do so has been available for some time. very simply therefore there is a case for the authorities to get involved, as a developer or a service provider, when a private sector solution that is in the public interest