. nor have any serious imbalances arisen. so thus far there is reason to be positive about the economic situation ; most leading indicators point to an economic recovery, with an upturn in activity during 2002. there is, however, the problem that inflation has for a time been clearly above the riksbank ’ s 2 per cent target. to a certain extent the comparatively high inflation can be explained by various supply shocks that have raised the prices of electricity, meat, fruit and vegetables, for instance. the background to these shocks includes the previous winter ’ s low precipitation for hydroelectric power, livestock diseases and poor harvests due to last autumn ’ s unusually cold weather in europe. as i said, shocks of this type can raise the general price level and lead, as in these cases, to a transitory increase in the rate of inflation. but even if one disregards these price increases, inflation has risen. as we discussed in a number of inflation reports last year, this probably has a number of interacting explanations. one is that resource utilisation in the swedish economy has probably been somewhat higher than envisaged earlier. this in turn no doubt explains why wage increases, particularly in domestic sectors, have been higher than expected. as this has been accompanied by weak productivity growth, mainly it seems for cyclical reasons, it has led to upward pressure on prices. a general contraction of profit shares in the economy as a whole has presumably helped to modify price increases in recent years. but this has also left firms with less room to “ absorb ” further additions to costs and weak underlying productivity growth. all this naturally raises questions about potential growth resource utilisation, inflationary pressure, competition in various markets and the workings of the economy. resource utilisation higher than expected ever since inflation expectations closed onto the target some time after the mid 1990s, a very important consideration for inflation forecasts and thereby for the formation of monetary policy has been resource utilisation. this indicator concerns the relationship between actual demand and what the economy is capable of producing in the longer run without price and wage increases accelerating. let me point out first that neither the potential growth rate, resource utilisation nor the inflation propensity in a wide sense is something that can be measured directly. for some years now the riksbank has been drawing attention to questions of this type, analysing them and presenting detailed accounts in the inflation report. although we have mainly referred to various supply shocks as explanations for inflation ’

solely transitory have already left their mark on monetary policy. that was the case not least last summer, when we raised the repo rate because of concern that the weak exchange rate combined with comparatively high resource utilisation might lead to the higher inflation becoming entrenched. in september we, like other central banks, cut the interest rate 0. 5 percentage points ; later in the autumn, however, we were more cautious about lowering the instrumental rate than, for example, the european central bank. since last may, the risk of higher domestic inflation has been weighted into our decisions. whereas the swedish repo rate at the beginning of last year was lower than its counterparts in the euro area and the united states, it is now higher. looking ahead, we have as usual not committed ourselves. what we do or refrain from doing with the repo rate will depend on the new information that becomes available and on how we assess and analyse it. what happened last year is a good illustration of the appropriateness of this approach. neither positive nor negative surprises can be ruled out. we have to be ready to cope with that. that said, we have inflation that is relatively high, even though we count on it becoming a good deal lower in the coming six months. resource utilisation is probably relatively high, too. the path of the interest rate will then depend – as long as inflation expectations remain in place – on how economic activity develops. if activity continues to strengthen as expected and there is no reason to reappraise the economy ’ s inflation propensity, it is reasonable to assume that the repo rate in sweden will be adjusted successively upwards. this does not come as a surprise to participants in financial markets. it is a natural consequence of the riksbank being in earnest about its task of ensuring a rate of price and wage increases that is in line with the inflation target in a situation where economic activity in sweden is become gradually stronger. here i am prompted to refer to what knut wicksell, the well - known political economist, pointed out in his day ; it is a matter of looking for the “ natural ” rate of interest at which the economy can expand without prices and wages rising too quickly.