risks as long as they can prove to the supervisor that they have adequate capital to back up those risks. the banks must also have the necessary governance structures to ensure that they have the capability to identify, manage and control all major risks. please do not misunderstand me ; i am not advocating that all countries should adopt the basel ii, not at all. in fact, it would even be hazardous for countries to adopt basel ii unless the underlying preconditions and regulations for basic banking are adequate. my point is only that basel ii is a type of regulation which maintains a balance between “ carrots and sticks ”. it lets the banks do their business as long as they manage and control it well, but if there are shortcomings in the banks ’ handling then basel ii provides increased powers to the supervisor to intervene at an early stage to rectify the problems. to sum up, basel ii mixes responsibility and flexibility for banks with strong supervision by authorities and the general public. whenever appropriate i would also promote a functional rather than an institutional approach to regulation. this means that a financial instrument or activity is regulated in the same way, whether it is linked to a bank or another type of financial institution. such treatment ensures fair competition and facilitates the development of an open financial system. an institutional approach implies that there is different legislation for different categories of financial institutions, also in the cases where they perform similar services. this may sometimes be necessary, but should be avoided since it may limit market competition and development. another divide goes between principles - based and rules - based regulation. in the first category, general principles are provided such as “ banks shall be managed in a safe and sound manner ”. the authorities may then interpret this and take measures against a bank when they see fit. rules - based regulation is more precise and says, for instance what a bank must do in order to ensure that it is managed in a safe and sound manner. i do not have a one - way view on this issue. the choice depends to some extent on your country ’ s legal traditions. recent financial regulation in my own country mixes the two approaches, setting the broad principles in the legislation and delegating to the authorities to formulate the more precise and detailed rules. this approach also fits well with the fact that the financial sector is developing fast. it is quicker to change secondary regulations than the legislation itself. when regulating financial activities, it is useful to apply an analysis of the costs and benefits to society. there

i therefore voted with the majority to cut the repo rate by a further 0. 25 percentage points. since then, we have learned that the outcome for gdp growth in the last quarter of 2011 was even worse than we expected at the time of the monetary policy meeting in february. this is largely because exports were even weaker than expected. however, we have also received outcomes for foreign trade in january which indicate that exports strengthened again after the turn of the year. we will receive further clues as to the current state of the economy before the next monetary policy meeting in april and will then review how this new information affects monetary policy. as i said earlier, in the slightly longer term the riksbank ’ s latest forecast is that there will be a gradual recovery in the euro area and the global economy following a weaker 2012. this will of course affect sweden too. it is expected that resource utilisation will increase, the rate of wage increases will accelerate and underlying inflation will gradually rise as growth improves. the latter is illustrated in figure 6. bis central bankers ’ speeches figure 6. gradually rising inflationary pressures the cpi, cpif and cpif excluding energy, annual percentage change cpif excluding energy cpif cpi - 1 - 1 - 2 - 2 note. the cpif is the cpi with a fixed mortgage rate. sources : statistics sweden and the riksbank low real repo rate for some time to come we will need to gradually tighten monetary policy when inflationary pressures and resource utilisation increase. the riksbank ’ s repo - rate path from february therefore indicates repo - rate increases during the course of 2013 and 2014. nevertheless, this forecast still means that monetary policy will remain highly expansionary in the years ahead. figure 7 shows that the real repo rate is expected to be negative in 2012 – 2013 ; that is for a substantial part of the forecast period. if this proves to be the case, won ’ t there then be a risk of monetary policy being too expansionary? won ’ t we perhaps risk overheating, a too high rate of inflation or an unsustainable development of household debt? this is of course not impossible, but at present i do not think that it is very likely. to explain how i have reached this conclusion i would now like to briefly summarise how i view some of the risks associated with a very low real interest rate. bis central bankers ’ speeches figure 7. low real repo rate for some time to