##ute the argument that the riksbank is supporting fixed exchange rates in these countries because the swedish banks would suffer large losses in the event of devaluation. devaluation or not, economic restraint is required over a long period of time to restore balance to the economies. this implies that the banks ’ loan losses will be around the same size in both alternative scenarios, but will probably have a slightly different distribution over time. what has the riksbank learned? as i have described, the riksbank had detected at a relatively early stage that the swedish banks ’ lending in the baltic region was not sustainable and that it would lead to significant risks. admittedly, the severity of the risks did gradually become clearer as time went. we took a number of measures, although they were all of a ” soft ” nature, such as discussions with the banks, with the authorities in the baltic countries and with finansinspektionen. however, it became clear that these measures did not have the intended effect. this is not a unique phenomenon ; experiences from many countries show that it is very difficult for the authorities to require constraint from the banks as long as their profitability remains good and loan losses are low. a complicating factor was that the authorities in the baltic countries did not see the impending risks, but expressly encouraged the swedish banks to maintain a high level of lending. the riksbank lacks sharp, legally - binding instruments for dealing with the banks in these situations. prior to autumn 2008 there was also no swedish framework for crisis management, and there are still significant shortcomings in the public management of individual banks in distress, which became clear in the case of custodia. the riksbank is currently analysing what further tools that might prove necessary. the riksbank is also considering how our messages regarding risks to financial stability can be made clearer. perhaps they must be based on a clearer interpretation of our mandate in the sveriges riksbank act which currently states that we shall “ promote stability in the payment system ”. perhaps we need to use more formal measures to a greater extent, such as expressing our recommendations in letters to the parties concerned. regardless of the importance of clarity, it is always a sensitive issue to determine at what point the riksbank can issue warnings regarding weaknesses in the financial system. this is of course even more difficult when it refers to another country. the riksbank therefore also works through non - public contacts with

- significant real interest rate is therefore the usual nominal rate with a deduction for expected inflation : real interest rate = nominal interest rate – expected inflation how expansionary the interest rate policy is, which is to say how low the real interest rate level is, is thus determined both by the nominal interest rate level and by expected inflation. this also means that how expansionary the level of interest rates can be made is not just determined by how far the nominal interest rate can be cut but also by how high inflation is expected to be. when inflation is expected to be high, the real interest rate can be made very low, but this also means that, as inflation expectations fall, the scope for cutting the real interest rate also decreases. the fact that inflation expectations were anchored around the target of two per cent meant that the low nominal interest rates of 2009 and 2010 ( see figure 2 ) gave households and companies very low real interest rates and supported the recovery of the swedish economy. with lower inflation expectations, the same interest rate policy would have had a less powerful stimulatory effect and that would probably have meant lower employment and even lower inflation in recent years. inflation expectations are thus of vital importance for how expansionary monetary policy is and how expansionary it can be made when the swedish economy is subjected to new severe stresses. the stimulus provided by a really low real interest rate can make it possible to avoid more prolonged low interest rate periods with the drawbacks in the form of rising indebtedness and exaggerated risk - taking that we are now concerned about. but if inflation expectations are too low, not even the lowest possible repo rate may be enough to push the real interest rate down to the desired level. to sum up, it is thus of great benefit to the swedish economy if households and companies, savers and investors, expect a future rate of inflation that is on a reasonably low level and that their expectations more or less correspond. the key to such jointly - agreed inflation expectations is that the inflation target of two per cent is seen as credible, which is to say that all parties expect that the riksbank will be able to hold inflation close to the target in the period ahead. bis central bankers ’ speeches inflation expectations were losing their stable footing at two per cent unfortunately, one of the unusual circumstances prevailing at the start of 2015 was that longterm inflation expectations were losing their stable footing around the target of two per cent. of course, there are no perfect measures of inflation expectations and