One disadvantage of this index, however, is that some of its components have not yet been finalised. As an aid in the analysis of price trends, the Riksbank’s inflation reports include various indicators of underlying inflation. The tolerance interval of ±1 percentage point serves, among other things, to accommodate the various transitory price movements that normally occur. Experience has shown, however, that in periods when the transitory price effects are extensive, inflation may move outside the interval without this by itself having consequences that should be considered in monetary policy. Thus, the tolerance interval represents the range that is normally expected for fluctuations in CPI inflation. It serves to indicate that the target variable, the CPI, cannot be controlled exactly. Still, I am convinced that people’s awareness and understanding of these factors will gradually grow as time passes. This will happen not least as a result of the efforts of all those knowledgeable analysts and business journalists who follow monetary policy closely and mostly do their utmost to explain these complex details to a broader public. Exchange rate of indirect importance for monetary policy Now I should like to say something about the role of the exchange rate. Our monetary policy strategy is premised on a flexible exchange rate. In other words, the Riksbank does not explicitly target the exchange rate and, given Sweden’s position on ERM, it seems today that the rate will continue to be flexible at least until a new political decision is taken on the issue of EMU.
The central banks also cooperate on matters of this type in the framework of the Bank for International Settlements in Basle, Switzerland, where representatives of central banks throughout the world meet regularly once a month. Conclusion To sum up, the financial system is undergoing a rapid transformation and development. The middle of the 19th century is commonly associated with the industrial revolution. Perhaps future historians will see the late 20th century as the era of the financial revolution. Europe’s move towards a single currency will accelerate the trend. The transformation and development of the financial system will ultimately contribute to future prosperity. But experience has taught us that it is a development which needs to be monitored very closely and presupposes a high degree of discipline in economic policy. It requires a great deal from decision-makers in the political system and the supervisory authorities, as well as from those of us who work in central banks. BIS Review 81/1998  -6-  Developments in the financial field are creating large opportunities. But it is also important to bear in mind that major, far-reaching changes normally entail risks. In view of these risks, every agent in the financial system needs to act wisely and discerningly. Only in this way can the full benefits be drawn from the opportunities that financial developments are providing. BIS Review 81/1998