##u issue have brought the question of the krona ’ s equilibrium level to the fore. participation in the euro area means that at some stage the krona ’ s exchange rate with the euro will have to be locked. in the discussion that will then be held with colleagues in europe, the actual decision will be a matter for the government. the riksbank, however, is responsible for choosing the conversion rate we find reasonable on sweden ’ s behalf. meanwhile, we must bear in mind that we are dealing with negotiations between sweden and the other eu member states, so it may be inadvisable to get tied down in matters of detail at an early stage. the riksbank has made it clear on numerous occasions that it considers the krona to be undervalued. much of the debate on this issue has stemmed from an article on the krona ’ s equilibrium exchange rate that was published early in 1996 in our quarterly review. the article was intended to serve as a basis for public debate ; in our opinion it provided the best foundation that was then available for discussing the krona ’ s long - term value. the krona ’ s equilibrium value is naturally something that the riksbank considers continuously and the analysis is constantly being developed. accounts of various aspects of the exchange rate have been presented in the inflation report. the material that will be produced in the event of sweden deciding to participate in erm2 / emu will have to incorporate the additional information since 1996. it should also be noted that the levels and intervals that were presented in the article refer to the krona ’ s trade - weighted exchange rate and are therefore not directly applicable to the question of a reasonable central rate for the krona against the euro. furthermore, the euro is a new currency. arriving at just the right future exchange rate for the krona against the euro is therefore not exactly easy. although the financial markets are naturally eager to know, at this stage it is too early to allow the discussion of the krona ’ s path to focus on specific intervals or levels. but the course is clear — in the event of a euro peg, the rate for the krona will be stronger than the current level. current monetary policy in conclusion i should like to say something about the monetary policy situation in sweden. international economic prospects gradually deteriorated during 1998. knock - on effects from the crisis that originated in asia were included from an early stage in the riksbank ’ s spectrum of risks. early in

the real economy have been favourable after the crisis. although unemployment has periodically been high measured by swedish standards, households ’ disposable incomes have increased substantially. higher incomes have meant that households can afford to pay more for their housing. thirdly, prices have also been affected by the fact that construction declined considerably directly after the crisis. when the demand for housing accelerated, it took some time before this could be met by a growing number of new houses on the market. quite simply, it takes time to build houses. it was not until around 2000, when house prices had become higher and made new production of housing more attractive, that construction really accelerated. moreover, there have been some significant changes in the mortgage market, which have also contributed to house prices rising so sharply. i will return to these changes shortly. the development of these factors largely explains why house prices have risen as much as they have in recent years. it does not appear to be a question of general over - optimism among households and lenders. i therefore do not see any serious risks to financial stability from developments in house prices at present. household indebtedness has also risen substantially household indebtedness has kept pace with property prices and has thus risen substantially. this development could also be a source of concern for those wishing to safeguard financial stability. if households have taken on more debts than they can manage to pay, it could lead to loan losses for the banks. debts have also grown much more quickly than incomes in recent years. today household indebtedness is even higher than it was prior to the crisis breaking out. households ’ total debts in relation to their annual disposable incomes amounted at the end of 2006 to just over 140 per cent. despite this high percentage, i do not feel any great concern. this is because even if debts are now at higher levels than they were prior to the crisis, today the costs of bearing these debts are not as great. the low real interest rates have meant that households'interest expenditure in relation to their incomes is at a historically low level. in addition, the households with the most debts are also those with the highest incomes and largest assets. the riksbank ’ s analyses of individual households ’ finances show that these in general have good margins for managing rising interest costs 3. households ’ loan - to - value ratios therefore do not appear likely at present to cause the banks such large loan losses that they would be a threat to the stability of the banking system.