term. if a financial crisis actually occurs it will of course have repercussions on both inflation and resource utilization. the trade - off is particularly severe if the central bank only has the policy rate at its disposal. in the swedish economy, we currently have a low inflation rate and relatively weak resource utilisation, while at the same time credit volumes have been increasing relatively sharply for a long time. there is therefore a trade - off between price stability and normal resource utilisation in the short term, and financial stability in the slightly longer term. for a central bank with only the policy rate at its disposal it is a case of balancing a poorer inflation and resource utilisation outcome in the short term against uncertain but very severe outcomes in the longer term. in such a situation, more expansive monetary policy can provide better fulfilment of inflation and resource utilisation objectives in the short term. however, more expansive monetary policy can also increase the risk of a financial crisis, and thus of very severe outcomes in the longer term. the way central banks work is changing the financial crisis has led to a change in how central banks should approach the trade - off between price stability and financial stability. before the crisis, the general perception was that the policy rate should be used to achieve price stability and to support the economic development. if a crisis nevertheless occurred, cleaning up afterwards would be relatively painless. with this approach, it was fairly simple to manage the trade - off between the objectives of monetary policy in the short term, and risks to financial stability in the slightly longer term, because the trade - off was negligible. recently, the pendulum has swung over to the view that monetary policy should lean against the wind to a greater extent, and take greater account of financial stability. 2 in the autumn of this rationale is based on drehmann, m., c. borio and k. tsatsaronis ( 2012 ) characterising the financial cycle : don ’ t lose sight of the medium term! bis working papers no 380. see e. g. king, m. ( 2012 ) twenty years of inflation targeting, the stamp memorial lecture, london school of economics, 9 october 2012 and eichengren, b. et al. ( 2011 ) rethinking central banking, committee on international economic policy reform, september 2011. bis central bankers ’ speeches 2007, i took part in a panel debate in jackson hole, and indicated then that it is better

without wishing to anticipate this inquiry, let me just note that we should, as far as possible, manage problems before they arise. finansinspektionen ’ s inquiry appears to be a step in this direction. the baltic countries – more stable but still cause for concern one risk tied to the financial markets and which is particularly important to sweden, is economic developments in the baltic countries. just a few weeks ago, we met here in the riksdag committee of finance to discuss the swedish banks ’ commitments in estonia, latvia and lithuania – what has happened in recent years, what we are expecting to see in the future and what we can learn from recent events. i do not intend to repeat what we talked about then, but can note that developments in the baltic countries do appear somewhat brighter now than they did a while ago, but that the future is still very uncertain. one question that could affect the region as a whole is, for example, estonia ’ s application to join the emu. loan losses in the baltic countries are still increasing, which in turn has a negative effect on the swedish banks ’ profitability. we are counting on loan losses there peaking during 2010, but also on the swedish banks being able to cope with the strains this will entail. an important element here is that the banks have increased their capital and thus their resilience to increased loan losses. the road ahead of us is not without problems. it is lined with a number of potential worries and difficult considerations, not least for central banks. but the situation in the financial markets is currently much more stable than it was during the crisis and the risk of setbacks has declined. one can say that the ice is safer. clearer signs of a recovery in the economic statistics as i have mentioned, there is a further overall reason that we are now on firmer ground. the economic statistics that have been coming in have been mainly positive. confidence in the future development of the economy has also taken a sharp upturn in sweden, the united states and the euro area ( figure 4 ). our assessment is that the situation in the world economy is continuing to improve. in most countries the economy is growing again and world trade is beginning to pick up after the abrupt slowdown in connection with the acute crisis ( figure 5 ). new figures have been published by statistics sweden since our most recent forecast was published. these show that gdp at the end of last year was lower than we had estimated. at