a stable and efficient financial system. but how does monetary policy, which is what my colleagues and i most often talk about, relate to financial stability? there are several links, both operational and analytical ones. essential that the riksbank can use its tools flexibly in a crisis let me begin with the operational work – that is, the tools that we at the riksbank have at our disposal. they are mainly aimed at affecting the volume of liquidity in the financial system. the tools are used both to implement monetary policy and to contribute to a smoothly - functioning payment system and to manage liquidity 7 the riksbank committee ’ s work includes reviewing the riksbank's responsibility for the central emergency preparedness in the payment system. 7 shortages in an individual institution or in the financial system as a whole. in the current sveriges riksbank act, the different tools are categorised according to different purposes, such as monetary policy ( which applies to most of them ) and liquidity supporting tools, primarily emergency liquidity assistance. a clear lesson from the financial crisis, however, is that measures taken in a crisis situation often contribute both to promoting financial stability and to the impact of monetary policy, which makes it difficult to distinguish these purposes. the riksbank – like a large number of other central banks – implemented a number of different measures during the crisis. we supplied liquidity, for instance, by offering loans in sek at longer maturities than usual, by increasing access to credit, which involved among other things accepting other forms of collateral than previously and extending the circle of financial institutions allowed to borrow from the riksbank, as well as offering loans in other currencies than sek. the measures that got the financial markets to function in the acute situation then prevailing also affected the monetary policy transmission mechanism from the repo rate to the interest rates paid by households and companies. by maintaining a smoothly functioning payment system and an efficient credit market, the riksbank thus contributed to both general financial stability and to the narrower monetary policy targets of price stability and stable resource utilisation. in other words, it is seldom meaningful – particularly in a crisis or in times of financial unrest – to make a distinction between measures taken for reasons of financial stability and measures taken to improve the impact of monetary policy. the sveriges riksbank act is narrow with regard to the areas of use for different tools, but the preliminary works to the act make it possible

up the issue of the link between our interest rate decisions and inflation. why have we begun to conduct less expansionary monetary policy despite the fact that inflation is, and has been, low? to understand the most recent interest rate decisions, it is important to remember that we do not adjust the repo rate to affect the present inflation rate, but to influence inflation a couple of years ahead. it takes time for monetary policy to achieve its full impact on the economy. monetary policy must therefore be based on expectations of the future, i. e. we are dependent on forecasts. it is therefore necessary that we occasionally ” lean against the wind ”, that is, that we raise the repo rate despite the current inflation rate being below target level or that we lower the repo rate despite inflation being above the target level. if we were only to look at the present inflation rate, there is a risk that we would be forced to make more drastic adjustments further ahead and this type of roller - coaster interest policy would benefit no one. how do we assess future inflation prospects? the economic outlook is currently bright, both in sweden and abroad. international growth has been both high and stable in recent years ( diagram 1 ). strong growth in the united states and parts of asia has been a driving force for global economic activity. increased participation in global trade by, among others, several asian countries has contributed to this upswing and to stiffer international competition. so far, the increase in global demand has not had a visible impact on consumer prices. this is despite the oil price having almost doubled over the past two years and substantial price rises on other commodities. most indications are that international economic activity will continue to develop well over the coming years. we are assuming that economic activity in the euro area will improve more and more and that growth in the united states and asia will slow down somewhat. the swedish economy has also shown good growth in recent years. the upswing in world trade has contributed to strong growth in swedish exports. over the past year, domestic demand has also developed favourably, partly due to stimulation from expansionary monetary policy. the labour market situation has at long last begun to improve. our assessment is that growth in the swedish economy will remain high over the coming years. household consumption is expected to accelerate and employment to increase. we also envisage inflation rising as capacity utilisation increases ( diagram 2 ). over the past six months we have witnessed the beginning of a rise in the rate