This applied, for instance, during the depression in the United States in the 1930s, when the large credit crunch was not sufficiently taken into account in monetary policy, and to the period prior to the high peacetime inflation rate during the 1970s and 1980s, when the money supply expansion was not taken into account. If we judge that developments might lead to substantial disturbances, the choice lies between attempting in time to avoid the accumulation of large imbalances and waiting until the situation turns and then counteracting the fall in demand. Many in the central bank world consider that interest rate policy should not react to asset prices and credit expansion in an upswing phase, over and above their estimated consequences for inflation and real stability in the short term. The arguments they bring out are that it is difficult to make an accurate evaluation and that it is uncertain what effect an interest rate increase will have. Other objections are that it may be difficult to be clear with regard to what has affected the interest rate decision and that confidence in the price stability target may therefore be undermined. Those who advocate a more preventive strategy meet this criticism by saying that there are nevertheless theories regarding asset price and credit cycles and some methods for calculating when large deviations from equilibrium levels are building up.
However, when the rate of increase remains at a high level, my concern increases that imbalances are being built up, which may later on check demand and inflation. This risk has been taken into account in the monetary policy decisions in recent years. The costs of increasing interest rates at a slightly faster rate than is motivated by the inflation forecasts made by traditional means must also be considered. My opinion is that when GDP growth has been strong, the risks in the housing and credit markets have carried greater weight in the decisions, and vice versa when the economy has been weaker. Inflation is low and stable… Let me begin by reminding you of why we have our current framework. The attempts during the 1970s and 1980s to keep employment up by means of a very active stabilisation policy led to sharply rising central government debts and high inflation. This laid the foundation for the current broad agreement that economic policy should not attempt to fine tune demand in the economy and that price stability should be the long-term objective of monetary policy. Price stability creates favourable conditions for  BIS Review 62/2006  1  households’ and companies’ decisions. It contributes to channelling savings to economically profitable investments, which benefits growth in the long term. In Sweden, as in the rest of the world, the rate of increase in consumer prices has been low for the past ten years, and inflation expectations have stabilised around 2 per cent in many countries.