discussion arises when inflation is well below the target level is not in itself surprising. however, it is important to have realistic expectations as to what monetary policy can achieve. changes of a structural nature are difficult to capture at an early stage of the forecasting work as it takes some time before it becomes clear that the changes are not merely transient factors. this is one reason that needs to be recognised why inflation may deviate from the target level. one indication of the difficulties in making accurate forecasts is that inflation in 2005 was overestimated by in principle all forecasters ( diagram 10 ). a comparison indicates, if anything, that the riksbank was among the first forecasters to take into account the effects that have subdued inflationary pressures. some analysts have periodically advocated a somewhat faster rate for interest rate cuts than that chosen by the riksbank. however, the difference has on average been small. given the effects of monetary policy normally assumed, the difference in inflation and employment would have been marginal. for monetary policy to bring inflation much closer to the target level, a radically different policy would have been necessary. for instance, the riksbank would probably have needed to cut the repo rate quickly and substantially a couple of years ago rather than making the gradual cuts that were implemented. it would have been difficult to justify this type of monetary policy given the view of economic prospects at that time. it is also clear that the monetary policy that was conducted has had a strong expansionary effect on the economy. for instance, gdp growth has been high. the expansionary monetary policy has also been evident in the rapid credit expansion in the household sector and the price increases in the housing market. it is doubtful whether it would have been wise to reinforce this development with even more expansionary monetary policy. unfortunately, the strong growth has not resulted in a corresponding recovery in employment. on the contrary, the labour market has developed more weakly than might have been expected from a historical perspective, given the high gdp growth. to some extent this reflects the unexpectedly high productivity growth. however, a reasonable explanation is that there are also problems in the labour market that are not cyclical. this is something that should be resolved by other means than monetary policy. let me conclude by saying that i welcome discussions on monetary policy. monetary policy is to a great extent based on assessments and it is therefore natural that there are differing opinions as to what should be done with the repo rate – both outside of the riksbank and

the banks, with well - known results. we need to put this right. we will therefore now have a system with many different types of constraints. government exposures are also risky another question discussed by the basel committee is if and how the banks should maintain capital to cover their exposures to governments and other public bodies. today it is in practice possible for the financial supervisory authorities to completely exempt such exposures from the capital adequacy requirement. we know from experience, however, that the banks ’ exposure to governments is not risk free. the basel committee has therefore decided to review whether and how the regulations need to be changed. almost 10 years on from the crisis – time to complete reforms the international regulatory work has been in progress since the global financial crisis broke out in 2007. it is important to many parties, not least banks, investors and policy - makers, to clarify how the global regulatory framework for banks will function. the basel committee is therefore working intensively on completing the current reform work by the end of the year 1. however, it is still not clear when the review of the exposures to governments and public bodies will be complete. 3 critics have expressed fears that the reforms i am talking about now will lead to minimum capital for certain banks increasing radically, which in turn risks resulting in a real economic decline. here i would like to point out that the basel committee ’ s ongoing reform work does not aim to significantly increase the total global capital requirements. instead, it concerns ensuring that all banks around the world have adequate resilience to manage financial crises and that risks are covered by capital in a uniform way in all banks and all countries. one result of this exercise is that banks that currently have very low risk weights will probably face higher capital requirements, while banks with very high risk weights may face lower capital requirements. designing a uniform global regulatory framework is not an easy task, particularly as banking systems differ from country to country, but also because we are living in a changing world. the basel committee's work is therefore largely a question of finding compromises that all member countries can support and which will stand the test of time. naturally, the basel committee is also evaluating very carefully the effects of the proposals now under negotiation. this applies to the effects on the banks as well as on society. following the financial crisis, a number of studies have been made regarding which capital levels are most appropriate from a socioeconomic perspective 2. many of them have shown that the macroeconomic advantages of