of money markets as soon as possible. after the acute stage those risks abated, even though the high level of debt and the volatile risk environment continues to demand great care in the implementation of monetary policy. on the other hand, the decisions of the central bank may gradually return to normal, as inflation and growth prospects come into focus again. what are the current dilemmas of monetary policy? at the beginning of the crisis, we saw that the protracted recession upset all of the price and wage - setting routines that had led to the stubborn inflation of previous years. disregarding bis central bankers ’ speeches the effects of tax increases and commodity prices, hungary has as low rate of inflation as its neighbours. price stability, however, is not merely a question of the level of inflation today ; rather, it depends on what economic agents think about future inflation. even though demand continues to be subdued, we think that the disciplined price and wage - setting behaviour which the private sector has exhibited in the past two or three years is beginning to loosen up, and analysts ’ longer - term inflation expectations have also risen. it is to be feared that – as a result of the repeated additional price rises due to a sequence of tax measures, rising commodity prices and soaring food prices – economic agents will consider an inflation rate considerably above the target to be normal. in such a situation, it is very difficult to assess the level at which inflation will settle when the extra price increase generated by the government no longer has an effect. the various answers to this question also contribute to the division in the monetary council. in my opinion, when inflation expectations, i. e. the longer - term inflation outlook, become uncertain, the central bank should act much more firmly to keep price and wage - setting behaviour disciplined. why is price stability important now? some think that – regardless of the answer to the question of whether the high inflation will “ fall or stick ” – the central bank must abandon its rigid stance and give priority to growth. this is a peculiar idea in a country where economic policy in the past two decades has always seen the solution in inflating away macroeconomic problems, without any tangible improvement in growth, i might add. indeed, we had to learn the hard way that even though leniency on inflation may appear attractive in the short term, it has never produced any welfare gain. by contrast, our neighbours – who have created price stability with consistent and tight monetary policy and a supportive fiscal policy – are leaving us

. bond and equity prices and that perhaps disrupts other national markets as well. i have seen little evidence to suggest that this scenario is likely, notwithstanding its popularity. the fall in the dollar since early 2002 has not disrupted financial markets, nor did the dollar's previous correction in the 1980s. moreover, most u. s. external debt is in dollars, so currency depreciation is unlikely to lead to the balance - sheet problems that arise during financial crises in developing countries, although obviously some parties that have not taken precautions would take losses. that said, central bankers are paid to be prudent and watchful, and we will obviously continue to monitor closely international financial markets and their effects on the u. s. economy. looking ahead, i see no obvious indications that the external sector poses significant concerns for growth or stability. not only has the decline in the dollar to date failed to disrupt u. s. financial markets, but most would judge that, on balance, it has had only modest effects on inflation. consumer spending is continuing to rise strongly and, although activity in housing markets has eased a bit, on balance, from the brisk pace of late last year, both sales and construction remain at high levels. in the business sector, spending on equipment and software appears to be increasing quite strongly, although outlays for nonresidential structures have remained weak. as has been the case over the past half - year, because of sizable increases in productivity, businesses seem to be able to boost production without adding much to their payrolls. going forward, policy makers will have to determine whether the improvements signaled in some recent labor market measures indicate that the economy is on a sustainable path to closing the pool of underutilized resources. although it has depressed job creation in the short run, increasing productivity is positive for the economy's long - run outlook and the creation of wealth. due, in part, to these same increases in productivity, inflationary pressures have generally been muted. now the process of disinflation appears to have ceased, and inflation has apparently stabilized. however, we cannot be complacent regarding inflation and inflation expectations. should the federal reserve conclude that the maintenance of price stability is in jeopardy, i am confident that it will act appropriately. conclusion to conclude, a change in the tone of international financial markets that required a substantial adjustment of the u. s. current account would obviously have important implications for spending and economic activity, both here and abroad. however