Monetary policy therefore involves balancing the risks of acting too soon against those of acting too late. Acting prematurely is liable to lead to unemployment being higher than it need be. If the Riksbank acts too late, on the other hand, price and wage increases may already have got under way. In that case, the economy may ultimately land in a recession, perhaps with even higher unemployment. Fortunately, it is not a question of either/or. A monetary policy adjustment can be decided gradually, with stepwise changes in the repo rate. Consequently it is always possible to compare forecasts with outcomes, assess the policy stance continuously and make the adjustments that are considered to be necessary. If monetary policy is successful, a foundation is laid, not only for low, stable inflation in line with the target and the Riksbank’s statutory objective, but also for a stable long-term growth of output and employment. Seen from this angle, low inflation, besides being our objective, is accordingly a means of trying to achieve a stable economic development in general. That is something which should be underscored. Inflation prospects In an analysis of the situation in the run up to the next Inflation Report, due to be published on 7 December, the following can be noted: •  The price trend to date is approximately in line with the forecast that was presented in the October Report. •  As expected, there have been signals that international economic activity is tending to become somewhat slacker.
Let me now refer to what I call a new set of instruments and their consequences for monetary policy. So far I have assumed that dealing with financial stress involves only “traditional” instruments. But if financial stress is too severe, some unconventional actions may be in order. In particular, if financial stress damages financial intermediation substantially, the channels through which “traditional” policy responses operate will be shut down. This is a “financial crisis”: a severe disruption of intermediation in financial markets. The policy response in this case is going to depend crucially on the type of financial market we are operating in. During the recent financial crisis, we saw direct interventions of some  6  BIS Review 76/2010  central banks in financial markets. This direct policy intervention has been called credit policy. Given that financial intermediation is severely impaired, central banks have stepped in to replace private financial intermediaries. In this way, central banks avoid a collapse of the economy and the self-reinforcing forces of deflationary spirals. In economies where banks are the most important financial intermediaries, credit policy may be less effective. That may be the reason why in some emerging market economies, state-owned banks apparently played an important role in mitigating the recent crisis. And also why in the past, a common policy action following a financial crisis was to intervene private banks. Coming back to credit policy, this policy has resulted in a significant increase in the balance sheets of central banks necessary to finance those operations.