we were in agreement that the swedish business cycle is fairly close to the point at which it is reasonable to give monetary policy a less expansionary stance. although we all endorsed the outlook for inflation and the economy in the inflation report a number of us were of the opinion that it provided scope for somewhat different interpretations of exactly when the interest rate needs to be raised. i myself and two other members for a more detailed overview of the debate ; see bean, c. ( 2003 ), " asset prices, financial imbalances and monetary policy : are inflation targets enough? ", speech at a bis conference on " monetary stability, financial stability and the business cycle ", 28 - 29 march 2003, basel, switzerland. ( http : / / www. bankofengland. co. uk / publications / speeches / 2003 / speech200. pdf ) interpreted the analysis in such a way that we deemed an increase of 0. 25 percentage points to be warranted already at the time of the monetary policy meeting. allow me to say something about the reasons that, in my opinion, suggest that it would have been appropriate to take a first step towards less expansionary monetary policy at the beginning of december. one is that there hardly can be any doubt now that we are in the midst of a strong, stable cyclical upswing. the economic climate has improved in the us and asia and the swedish labour market is showing clear signs of a recovery – not least statistics from staffing companies are pointing to a pick - up in demand for labour. another reason is that an interest rate rise would reduce the risk of the krona weakening further as monetary policy in other countries gradually becomes less and less expansionary. the interest rate differential in relation to the euro area and the us seems recently to have had great significance for developments in the krona exchange rate. a third reason – perhaps the most important – has to do with what i have spoken about here today. my assessment is that house prices and household debt may very well have reached levels at which there is a risk of there arising a self - reinforcing negative spiral with falling house prices and weak demand growth when the business cycle eventually turns down. even if it were not – as i already pointed out – a case of a correction of an overvalued market, such an adjustment could be comparatively abrupt. in my opinion, an earlier initiated and more gradual raising of interest rates would increase the chances of a more orderly slowdown in the rate of price

of households ’ payment difficulties and sharp falls in collateral values could potentially cause problems for the banks. however, this is unlikely to happen in sweden for several reasons. one is that house price developments in the country as a whole – as indicated by the analyses in the financial stability report we published about a month ago – seem to be explained pretty well by normal underlying factors. these include of course the interest rate level, which for a relatively long period has been low. at the end of 1996, when house prices began to rise again after the crisis years, the average nominal mortgage rate for households was around 9 per cent. today, it is approximately 4 per cent. furthermore, households ’ disposable incomes have grown firmly during this period. another factor, of course, is the developments on the supply side, where construction of new homes has been very modest. this fell dramatically in conjunction with the crisis in the 1990s and has only begun to pick up in recent years. so it appears that the upswing in house prices has not been driven by general overoptimism among households and lenders. it might also be worth mentioning here that one reason why the elements of pure speculation probably are small is that swedish households, unlike those in some other countries, mainly buy homes to live in and not as an investment. the risk of speculative price formation increases in countries where it is common to buy - to - let, with the investor waiting for the home to rise in value before realising a capital gain. this kind of speculation has likely pushed up house prices in above all australia, but presumably also in the uk, the us and ireland. another reason why the developments in the housing market and households ’ high debt levels are unlikely to pose a threat to financial stability is that households ’ ability to service debt is good. on the whole, households are judged to have financial margins that enable them to cope with rises in interest rates or a temporary loss in income without encountering payment difficulties. in addition, the banks ’ earnings are good. past experience also shows that it is unusual for the household sector to cause the banks ’ particularly large loan losses. this is fairly natural in one sense. the decision to invest in a home is one of the most important a household makes, and when the decision has been taken the household is often prepared to make rather big sacrifices to meet its obligations. it is worth noting that during the crisis years at the beginning of the 1990s, losses on loans to the household sector accounted for only