other central banks had cut their instrumental rates on 17 september, on the same day the riksbank decided to lower the repo rate 0. 5 percentage points. an increased risk was perceived of inflation two years ahead being below the target, mainly because business and household confidence in the future might weaken and lead to a slowdown that was deeper and more protracted. the terrorist attacks led to great uncertainty in the financial markets. from what i have now said it will be clear that in recent months monetary policy has taken its cue from declining economic activity. gdp growth has slackened from a level of 3 to 4 per cent in recent years to a rate of between 1 and 1. 5 per cent. meanwhile, since last year the krona has depreciated by around 15 per cent. another consideration is that notwithstanding the low growth of demand, inflation has been surprisingly high. these forces have acted with varying strength on the riksbank ’ s inflation forecasts in recent months. roughly speaking, when economic activity is slowing — with a given potential growth rate — after a time inflation falls back. a weak exchange rate pulls in the opposite direction, however, and can lead to higher price increases : directly through rising import prices and indirectly by stimulating production for export. in addition, abrupt exchange rate movements are liable to affect inflation expectations, a problem that is accentuated when inflation is springing unpleasant surprises. the krona ’ s weakening in the early summer, after the riksbank had presented this year ’ s second inflation report, probably had to do with a combination of slackening export activity and portfolio adjustments. moreover, inflation outcomes in the late spring had been surprisingly high. if higher inflation expectations are allowed to take root and also show up in time in a currency depreciation, public confidence in monetary policy ’ s systematic commitment to a rate of inflation in line with the 2 per cent target may be shaken. the weakening of the exchange rate in that period was an isolated swedish phenomenon, which made it particularly serious. the krona also weakened in the aftermath of the terrorist attacks on 11 september but the circumstances then warranted a different interpretation. general uncertainty in the financial markets was accompanied by extensive portfolio adjustments after the terrorist attacks. the pattern is clear from similar periods in the past, for example the autumn of 1998 when russia suspended payments on parts of it s government debt and a major american hedge fund collapsed. what happens is that certain currencies weaken, others, particularly large ones, appreciate

stefan ingves : evaluation of the riksbank ’ s monetary policy and work on financial stability 2005 – 2010 speech by mr stefan ingves, governor of the sveriges riksbank and chairman of the basel committee on banking supervision, to the riksdag committee on finance, stockholm, 31 august 2011. * * * the riksdag ( the swedish parliament ) and the people of sweden must be able to see that the riksbank is doing its job well. it is therefore necessary for them to have good insight into our work and for the riksdag to be able to make regular evaluations of this work. the evaluations are also important for the riksbank to be able to develop and improve its analyses. we have already said on several occasions that we consider it an excellent initiative by the committee on finance to regularly commission highly - qualified external experts to evaluate our work. today, when we are to discuss the second evaluation of this type, i would therefore like to begin by thanking professors goodhart and rochet for carrying out this work on behalf of the riksdag committee on finance. we also welcome the committee on finance ’ s decision to give the evaluators the task not only of assessing how we conduct monetary policy, but also how we manage the task of promoting a safe and efficient payment system, that is, what we have interpreted as our responsibility for financial stability in sweden. we at the riksbank prefer to present our more detailed views on the evaluation during the consultation rounds, so today i intend to make a few more general comments. regarding financial stability – we need clear legislation and efficient institutions i do not believe that anyone would still doubt that the risk of a financial crisis is a very real risk that we must learn to live with and to manage in the best possible way. it is probably also quite clear what is at stake here – a financial crisis could entail substantial costs for society. we must therefore learn from the experiences of the crisis and ensure that we are as wellequipped as possible to face any new crises in the future. this requires in an initial stage taking an overall approach to both crisis management and crisis prevention work, something that the government ’ s recently - appointed financial crisis commission has been tasked to deal with. ultimately, the goal is to establish effective legislation and efficient institutions. the financial crisis that we have lived with over the past few years has tested institutions and legislation to breaking point, in sweden and abroad