private consumption is continuing to rise at a subdued but stable rate and its composition seems to be shifting in favour of durable goods, cars in particular. there are no signs that in the coming two years the economy will exceed the level of potential output at which inflation is liable to pick up. the level of inflation expectations is also compatible with the inflation target. the exchange rate has been weaker than assumed in the latest inflation report and the current level of the effective exchange rate does not mirror fundamental trends in the economy. this points to some future appreciation. meanwhile, gdp growth in 1996 seems to have been somewhat lower than the riksbank counted on, which implies a somewhat larger output gap. all in all, the picture of future inflation does not appear to have changed from the assessment in the december inflation report. the conclusion in that report - that monetary policy is relatively well balanced - therefore holds good. the riksbank is continuing to evaluate effects of the interest rate cuts that were implemented during 1996, together with new information about real economic activity, inflation expectations and the exchange rate. this in turn will determine the future course of monetary policy, that is, whether the repo rate should be kept at its present level or whether there is any limited room for manoeuvre.

so that deflation as well as inflation are avoided, monetary policy can then exercise a stabilising influence and help to smooth economic fluctuations around the long - term trend. problems arise if resource utilisation becomes so high that inflation starts to accelerate and the central bank has not intervened. people may then begin to count on inflation remaining high in the longer run. a higher level of inflation may then be established, whereas the effects on production and employment will be only temporary. this is a reason why the central bank should act with foresight and be alert to the development of inflation expectations. the potential for influencing fluctuations in activity around the trend is dependent on people ’ s appraisal of the central bank ’ s determination and ability to maintain price stability. central bankers talk of the importance of credibility, by which is meant the extent to which people expect inflation to be in line with its targeted rate. the degree of credibility is conditioned by, for example, the historical record of inflation and the existence of government financial deficits. weak credibility calls for caution in monetary policy, just as higher credibility confers more room in which to manoeuvre. experience has shown, moreover, that even in the shorter run, the possibility of influencing employment and unemployment via monetary policy is very limited. limited fluctuations around the growth trend are by no means sufficient condition for a smooth development of employment and low unemployment. comparisons between countries and regions reveal that a similar growth pattern, even over a considerable period, can involve markedly divergent effects on employment and unemployment. this highlights the function of the labour market. it is there that measures must be taken in order to tackle problems with employment and unemployment. i want to underscore some conclusions from this discussion. monetary policy cannot have growth as the primary objective because it is not capable of influencing growth in the longer run. at the same time, monetary policy can be used to smooth fluctuations in activity around the growth trend. but i should emphasise that this presupposes that the central bank is committed to price stability and that its policy is perceived as credible. with low inflation, moreover, the economy will function more efficiently. it is important, i believe, to realise that price stability ’ s status as the monetary policy objective does not imply a lower priority for growth and employment as economic policy ’ s overall objectives. rather than being an impediment, low inflation creates good conditions for growth. in order for this to be combined with low unemployment, the labour market must