open economies can be vulnerable to large capital movements when powerful instruments are deployed by large countries. a possible side - effect of balance sheet policy is that the private sector also takes longer to strengthen equity capital and reduce risk than it would otherwise have done. with the low price of capital, it costs little to postpone restructuring and put off debt repayment. finally, confidence in economic policy may be affected. the dividing line between monetary and fiscal policy seems to be more blurred. balance sheet policy may dampen the effects of market volatility on interest rates and give heavily indebted countries a breathing space and time to adjust. on the other hand, the measures may also reduce the incentive to carry out necessary fiscal tightening. in the euro area, different considerations are now being balanced in the new “ outright monetary transactions ” ( omt ) programme. under this programme, the european central bank ( ecb ) may only purchase bonds from countries that have entered into a loan agreement under the european financial stability facility ( efsf ) or the european stability mechanism ( esm ) – which in turn is conditional on a commitment to fiscal tightening. chart : corporate borrowing rates one reason for the ecb ’ s decision to establish the omt programme is the partial breakdown of the monetary policy transmission mechanism in the euro area economy. there are wide differences in interest rates facing banks and firms across europe. although the same key rates apply to all the euro area countries, average corporate borrowing rates differ widely from country to country. some of the variation is due to differences in credit risk across countries owing to very different economic situations. additional risk premiums may reflect fears that one or more countries might at some point have to replace the euro with a new local currency. ecb president mario draghi has referred to these as convertibility risk premiums. one of the objectives of the omt programme is to reduce this premium and restore the proper transmission of monetary policy. the omt programme can be regarded as an answer to the signs of financial market fragmentation in the euro area. differences in financial conditions across countries have become considerable and the willingness to provide loans across national borders has declined. the same picture is reflected in the so - called target2 balances. target2 is the central interbank settlement system in the euro area. in all countries, interbank payment settlement is carried out by the national central bank. one bank ’ s payment to another is settled by adjusting the two banks ’ deposits in the central bank. central bank

to make allowances for such circumstances ; otherwise they could have serious repercussions for the real economy. and our monetary policy framework provides scope for this. but no two situations are ever exactly the same. it is necessary to have a thorough analysis on which to base our standpoints and an explanation for our decisions. another reason to deviate from the policy rule is if inflation is judged to be influenced by temporary effects, i. e. effects that will diminish without any monetary policy intervention. that, for example, is why we often focus our discussion on und1x, the measure of underlying inflation that excludes the effects of indirect taxes and subsidies as well as interest rate changes. but it can also be a case of temporary supply shocks that are not expected to persist, such as the sharp rise in electricity prices at the turn of the year 2002 / 2003. for a number of years the confidence in monetary policy and economic policy in general has been high enough to allow such factors to be taken into account. but at the same time it places demands on our communication – that we are clear, for example, about when there is reason to extend the forecast horizon and why. it is also one of the reasons that we introduced some improvements to our decision - making material in our most recent inflation report, which we expect will help us explain and justify our actions more clearly. these included extending our forecast horizon somewhat in certain situations. so we do have room for a considerable measure of flexibility. and we have also made use of that over the years. on several occasions, e. g. 2001 and 2003 but also earlier, we made it clear that we had disregarded transitory effects that were affecting inflation. the riksbank has also referred to developments in asset prices, e. g. in 2000, but we did not believe at the time that it gave reason to allow policy to be affected to any great extent. recently, however, developments in property prices have had some, albeit limited, significance for our monetary policy decisions. the inflation target is thus our point of departure, and we normally apply a time horizon that reflects the lag with which monetary policy has an impact on inflation. but we are prepared to depart from this if we have good reason to. our ambition in such cases is to communicate the reasons clearly. why has inflation been so low? let me now go on to address the factors behind the current inflation rate. the gauge that the riksbank has chosen for