repo rate should therefore be raised ( lowered ). the time has not yet come for an increase in the repo rate, but when it does, our action will hopefully be seen as a natural ingredient of a monetary policy for price stability. our ambition is to take predictable and timely measures so that sizeable interest rate movements can be avoided. still, it is hardly surprising that the direction of monetary policy is being discussed. at present swedish monetary policy ’ s overall impact can be described as expansionary at a time when activity is becoming stronger. the short - term real interest rate is between 2 and 2. 5 per cent, depending on the exact maturity and how inflation expectations are measured. how a neutral monetary stance translates into the short real rate is difficult to determine precisely but it can be said that the current rate is comparatively low, with an impact on total demand that should be stimulatory. in addition, the level of the real exchange rate is weak in relation to a reasonable long - term equilibrium. this means that its effect is stimulatory, too. the combined effect of the short interest rate and the exchange rate is therefore tending to support the economic upswing. all else equal, an expansionary monetary stance leads to a successive acceleration of demand. in time, this may generate a growth rate that exceeds the economy ’ s long - term potential. the ability of the economy to cope with a high demand trend is not unlimited. as unutilised resources are activated and the output gap closes, bottlenecks of various kinds arise in the labour market or in real capital. it is in such a situation that inflation may accelerate. in order to avoid the occurrence of shortages and accelerating inflation, the monetary stance must not remain too expansive for too long in an upward phase. instead, a timely adjustment - - bearing in mind the lag associated with monetary policy - - must be made to a more neutral position before the output gap closes. this promotes a continued growth of demand at a rate the economy can absorb - - for instance with the help of new investment, improved efficiency and labour supply - - without generating inflationary bottlenecks. the purpose of such a monetary adjustment is not to break the expansionary trend but to achieve growth that is more sustainable. in other words, a shift from an expansionary stance to one that is more neutral is designed to bring the economy onto the growth path that matches its structure - - not to bring growth to a halt. neither should

for monetary policy. this holds unless transitory price effects influence inflation expectations. in a setting where inflation expectations are firmly anchored to the inflation target, monetary policy has some room for manoeuvre. but if expected inflation starts to rise, we must be on the alert, particularly in that the current monetary stance is stimulatory. the importance of expected inflation for price and wage formation was evident not least in connection with the 1995 round of wage negotiations. at that time, expectations of future inflation seem to have been a bit above 4 per cent, which probably contributed to the excessively high level of the ensuing wage agreements. now that the swedish economy is on the threshold of very important wage negotiations, there must be no doubt that the riksbank is truly serious about the inflation target. future wage formation is yet another risk factor that the riksbank has to consider. there are some encouraging signs that wage formation is moving in the right direction, even though the parties have gone in for a certain amount of bidding. this tends to be a process that conveys a varying degree of realism. it is important to bear in mind that wage formation is not just a matter of the level of wage agreements. the outcome for wages is also conditioned by the wage drift that mirrors labour supply and demand. the less efficiently the labour market works, the sooner bottlenecks arise that generate increased wage drift. tendencies to labour shortages in certain sectors are already discernible, despite the high unemployment. conclusion : monetary stance well balanced ; changes in the spectrum of risks a monetary policy that aims for sustained price stability is not at odds with good economic growth. this presupposes that the supply side functions so well that growth does not give rise to inflationary impulses. but if the structure of the economy is such that only moderate growth is feasible, demand and accordingly the monetary stance must be adjusted accordingly. the alternative is demand growth that exceeds what the economy is capable of producing without inflationary bottlenecks. accelerating inflation is a threat to sustainable growth and may even result in serious economic setbacks, as history has taught us. as economic activity becomes stronger and monetary policy adjusts its sights on the future picture, the riksbank ’ s monetary stance will have to gradually move away from its current expansionary position. the timing of such a move has to be assessed in the light of new information and today one cannot say when it will happen. our present assessment is that the monetary stance is well balanced