There is little to suggest that the US federal budget deficit will narrow to a sufficient extent. That is worrying, especially given that the country in the long term will see sharply increasing costs for medical care, health care and pensions. As a result there is a clear risk of rising market rates in the US that could trigger a fall in house prices, which in turn could dampen private consumption. A reduction in public expenditures would also have a tightening effect but in the long term would lead to a more balanced development and thereby prevent an overly quick rise in rates. Another risk factor is the oil price. As the US is more oil-dependent than the euro area countries, its economy is more sensitive to changes in oil prices. Should the oil price remain at a high, fluctuating level it may curtail growth in the US. All in all, this picture of large global imbalances implies a clear risk that growth will be more subdued over the coming two-year period. The question is how fast this slowdown may come about. If controlled, the moderation would be softer, while rapid changes could entail a considerable weakening of the world economy and thereby also check Sweden’s economic performance in the period ahead. In addition to the competition problems that an ever stronger euro means for Europe there is the issue of how we are to meet the competition from low-wage countries, both the new member states of the EU and the emerging economies in Asia.
But since the high energy prices were expected to gradually fall back entirely we saw them as temporary and decided to leave the repo rate unchanged. When the current regime of inflation targeting was established in the early 1990s it had been preceded by a long period of high, fluctuating inflation in both Sweden and other countries. Many countries around the world experienced a similar shift in regime around this time. Partly as a result of this, international inflation fell sharply during the 1990s, from about 30 per cent to below 4 per cent a year on average.4 The inflation targeting regime and its practical application has been underpinned by the conviction that high, variable inflation is bad for the economy. Now we are living in a world with very weak price increases, particularly for manufactured goods. Is there anything in the current circumstances that could motivate a change in the Riksbank’s thinking? The integration of China's and India's large, fastgrowing economies into the world economy will most likely affect world growth and inflation for a long  inflation targeting – theory and practice", Sveriges Riksbank Quarterly Review 4, 13-42, for a similar discussion that is linked to the monetary policy framework in Sweden. 3  Read more about this in, for example, Palmqvist S. & Strömberg L. (2004), "Households’ inflation opinions – a tale of two surveys" in Sveriges Riksbank Economic Review 4, 24-43. 4  See Rogoff, K. (2003), "Disinflation: An Unsung Benefit of Globalization?" BIS Review 10/2005  5  time.