the target than the usual two years. for instance, the economy could suffer a major supply shock that led to prices of commodities, energy and foods rising or falling substantially. in these situations it might be reasonable to accept a longer deviation from the target than two years if the strain on the real economy would otherwise be unacceptably high. let me summarise : the riksbank has one objective for monetary policy and that is to maintain price stability. the riksbank's method of working encompasses possibilities within this framework to take into account different aspects of interest rate decisions, such as fluctuations in the real economy. however, such considerations do not mean that we have specific targets for other quantities than inflation. a look back - inflation 2005 finally, i intend to take a look back at developments in inflation over the past year. this is to follow the usual custom at the first hearing of the year and give an account of the outcome of the monetary policy conducted. as you know, inflation was low last year ( diagram 6 ). for the second year in a row, the inflation rate was below the riksbank's tolerance interval for inflation. und1x inflation was 0. 8 per cent and cpi was 0. 5 per cent on average for the year. the forecasts of inflation made by the riksbank in 2003 and 2004 anticipated that inflation would be much higher than that in 2005. why was inflation surprisingly low? to begin with, one can observe that it was not due to a weak economic upturn. on the contrary, the economic upturn accelerated in 2004 and growth was even stronger than expected. last year the economy also continued to grow at a good rate. to understand the low inflation it is necessary to find other explanations than weak demand in the economy. the reasons should mainly be sought in the positive changes on the supply side of the economy, which i have already mentioned, namely high productivity growth and low import prices. high productivity growth has held down cost pressures in the economy more than expected. production has been able to increase without any particularly high increase in companies ’ labour costs per unit produced ( diagram 7 ). during 2003 and 2004 unit labour costs in the business sector actually fell. at the beginning of an economic upturn it is normal to have a period when production increases at a more rapid rate through companies using existing labour force more intensively rather than through new recruitment. however, even taking into account the business cycle, productivity growth has been high in recent

up the issue of the link between our interest rate decisions and inflation. why have we begun to conduct less expansionary monetary policy despite the fact that inflation is, and has been, low? to understand the most recent interest rate decisions, it is important to remember that we do not adjust the repo rate to affect the present inflation rate, but to influence inflation a couple of years ahead. it takes time for monetary policy to achieve its full impact on the economy. monetary policy must therefore be based on expectations of the future, i. e. we are dependent on forecasts. it is therefore necessary that we occasionally ” lean against the wind ”, that is, that we raise the repo rate despite the current inflation rate being below target level or that we lower the repo rate despite inflation being above the target level. if we were only to look at the present inflation rate, there is a risk that we would be forced to make more drastic adjustments further ahead and this type of roller - coaster interest policy would benefit no one. how do we assess future inflation prospects? the economic outlook is currently bright, both in sweden and abroad. international growth has been both high and stable in recent years ( diagram 1 ). strong growth in the united states and parts of asia has been a driving force for global economic activity. increased participation in global trade by, among others, several asian countries has contributed to this upswing and to stiffer international competition. so far, the increase in global demand has not had a visible impact on consumer prices. this is despite the oil price having almost doubled over the past two years and substantial price rises on other commodities. most indications are that international economic activity will continue to develop well over the coming years. we are assuming that economic activity in the euro area will improve more and more and that growth in the united states and asia will slow down somewhat. the swedish economy has also shown good growth in recent years. the upswing in world trade has contributed to strong growth in swedish exports. over the past year, domestic demand has also developed favourably, partly due to stimulation from expansionary monetary policy. the labour market situation has at long last begun to improve. our assessment is that growth in the swedish economy will remain high over the coming years. household consumption is expected to accelerate and employment to increase. we also envisage inflation rising as capacity utilisation increases ( diagram 2 ). over the past six months we have witnessed the beginning of a rise in the rate