interest rate cuts this spring. against that background it is accordingly difficult to claim that aggregate monetary conditions in sweden have become tighter, even though the riksbank raised the repo rate last december and, most recently, at the beginning of july. i should point out here that it is not the krona ’ s current value that features in the riksbank ’ s overall inflation forecast and monetary policy. what we use instead, as described in our inflation report, is an assessment of the krona ’ s future path. the krona ’ s future path is invariably a major factor behind the riksbank ’ s inflation forecast. and it is the inflation forecast that forms the foundation for monetary policy. thus, the development of the exchange rate, demand, inflation expectations and so on all affect the interest rate decision indirectly via the inflation forecast. it is never a simple matter to determine the path for the exchange rate in the coming one to two years that ought to be used in the assessment of inflation. but as long as all reasonable assessments point to the swedish economy being in good shape, in the long term that should also motivate an exchange rate that is considerably stronger than we have seen in the past year. in other words, there have been grounds for counting in the inflation report on a somewhat stronger krona even in the period one to two years ahead that guides monetary policy. but when the krona began falling almost 5 per cent in the course of only a fortnight early this summer, it ultimately became difficult to count on the exchange rate becoming as strong as the forecast envisaged in the coming two years. the weaker the initial position, the larger the requisite appreciation. to quote the press release from 15 june, the executive board considered that “ the krona ’ s depreciation since the latest inflation report is the most important single factor that may lead to the inflation target being threatened 1 - 2 years from now ”. the riksbank had then initiated currency market interventions with a view to strengthening the krona. when the executive board met on 5 july the krona was still weak. in the light of the current forecasts of resource utilisation, the exchange rate and demand, a majority of the board members concluded that the repo rate should be raised 0. 25 percentage points, to 4. 25 per cent, in order to avoid the risk of inflation exceeding the target 1 - 2 years ahead. the picture also included considerable price increases during the spring which

last year offset the pressure from rising compensation gains on labor costs per unit of output. and non - labor costs, which are roughly a quarter of total consolidated costs of the nonfinancial corporate sector, were little changed in 1996. owing in part to this subdued behavior of unit costs, profits and rates of return on capital have risen to high levels. as a consequence, a substantial number of businesses apparently believe that, were they to raise prices to boost profits further, competitors with already ample profit margins would not follow suit ; instead, they would use the occasion to capture a greater market share. this interplay is doubtless a significant factor in the evident loss of pricing power in american business. intensifying global competition may also be limiting the ability of domestic firms to hike prices as well as wages. competitive pressures here and abroad should continue to act as a restraint on inflation in the months ahead. in addition, crude oil prices have largely retraced last year ’ s run - up, and, with the worldwide supply of oil having moved up relative to demand, futures markets project stable prices over the near term. food prices should also rise less rapidly than they did in 1996 as some of last year ’ s supply limitations ease. nonetheless, the trends in the core cpi and in broader price measures are likely to come under pressure from a continued tight labor market, whose influence on costs will be augmented by the scheduled increase in the minimum wage later in the year. and, with considerable health - care savings already having been realized, larger increases in fringe benefits could put upward pressure on overall compensation. moreover, although non - oil import prices should remain subdued in 1997 as the sharp rise in the dollar over the past year - and - a - half continues to feed through to domestic prices, their damping effects on u. s. inflation probably will not be as great as in 1996. the lagged effects of the increase in the exchange value of the dollar will also likely restrain real u. s. net exports this year. in addition, declines in real federal government purchases should exert a modest degree of restraint on overall demand, and residential construction will probably not repeat the gains of 1996. on the other hand, financial conditions overall remain supportive to the real economy, and creditworthy borrowers are finding funding to be readily available from intermediaries and in the securities markets. moreover, we do not see evidence of widespread imbalances either in business inventories or in stocks of capital equipment and consumer