mr backstrom discusses the monetary policy situation in sweden speech by the governor of the bank of sweden, mr urban backstrom, at stockholm chamber of commerce and veckans affarer on 2 / 2 / 99. thank you for the invitation to attend this conference and talk about “ the krona and the interest rate ”. i shall be speaking mainly about the current monetary policy situation and the factors that may be crucial for the policy ’ s future formulation. however, now that the riksbank is directed by the six members of the new executive board, which also makes the monetary policy decisions, the decision - making process has changed. so i shall begin by briefly describing how monetary policy will be decided and presented in this new environment. the new process for monetary policy decisions at 1pm on thursday 11 february, the new executive board of the riksbank will be convening for its first meeting specifically devoted to monetary policy. compared with the board ’ s ordinary sessions, the discussion at what are called monetary policy meetings is to cover monetary policy more comprehensively and conclude with a decision on the policy ’ s future stance. the discussion will be minuted and published in this form on 6april, around eight weeks after the event. moreover, a brief account of the grounds for the decision will be presented in a communique on the day after the meeting, in this case at 9. 30am on friday 12 february. these monetary policy meetings will be held 8 – 10 times a year and the minutes will be published with a time lag of 6 – 8 weeks. monetary policy matters may, of course, appear on the agenda in the intervals between these meetings, particularly as repo rate decisions are normally made once a fortnight and announced for the coming two weeks. in the normal course of events, however, it is envisaged that repo rate decisions will be based on the discussions at monetary policy meetings. so it is only under special circumstances that monetary policy will need to be discussed more comprehensively in between the meetings specifically reserved for this. for the riksbank, this is a new procedure. the time when decisions will be announced is also new. in future, monetary policy decisions will be published on fridays at 9. 30am, though there may be exceptions to this rule in certain cases, such as the publication of the inflation report. judging from their newsletters, it seems to me that so far most market players have understood our new arrangements. that is

including the recent period, transitory price movements have brought the annual average change in the cpi just outside the lower limit of the target ’ s tolerance interval. there have even been periods when trend inflation has been lower than expected. for the decision - making of monetary policy, as the riksbank has pointed out earlier, transitory effects on inflation are normally a secondary consideration. we are working to clarify how the target formulation is applied in order to dispel any uncertainty about how we should appraise direct effects on consumer prices that come from movements in, for example, house mortgage interest costs and indirect taxes. altered conditions for international developments last autumn, in the september inflation report, the riksbank pointed to a growing risk of a weaker international trend on account of the crisis in asia. however, the outlook was complicated by a marked weakening of the krona, which could have a contrary effect on inflation. the exchange rate influences inflation via the level of resource utilisation and via the development of import prices ; in the past two years the impact has come mainly from the first of these two mechanisms. as the effects on import prices should be regarded as transitory, they are of secondary importance for the monetary stance provided they do not alter expectations of inflation in the medium term. in other words, exchange rate movements are relevant only if they affect inflation ’ s future trend though, for a small, open economy, exchange rate stability is, indeed, desirable. in september and part of october last year, immediately before and after the publication of the report, the monetary policy environment was turbulent and difficult to assess. besides the international unrest, it was uncertain how fiscal policy would be constructed after the general election. all this prompted the riksbank to keep the repo rate unchanged. the possibility of a repo rate cut would be considered when inflation prospects had become clearer. during the autumn the financial unrest grew. the suspension of debt payments by the russian government in mid - august, followed by the problems in the us hedge fund long - term capital management that came to light at the end of september, contributed to the markedly more nervous mood. stock markets fell around the world and the financial crisis spread to other emerging markets that had previously not been hit. the lower share prices and the contagious spread of the crisis to other markets were liable to have consequences via decreased demand for exports from the industrialised countries, as well as via more cautious behaviour among their consumers and firms. – 3 – the