But an appreciably weaker development of consumption, which was a prominent component of one of the alternative scenarios, seems to have become somewhat less probable. Exchange rate The Riksbank does not target the exchange rate. The monetary policy target is price stability. But the exchange rate does feature as one important factor in the Riksbank’s assessment of inflation in the coming two years. The exchange rate conditions demand in the economy, particularly in the export sector, and also affects inflation directly in the form of import prices. The latter, more immediate effect is, however, transitory and of secondary interest provided it does not influence inflation expectations and thereby price and wage setting behaviour. An assessment of future inflation therefore requires a forecast or judgement of the exchange rate in the coming two years, yet this is a variable that is notoriously difficult to predict and has fluctuated widely for Sweden since 1992. A natural starting point for this is the current exchange rate together with an estimate of what a reasonable long-term level might be in relation to competitiveness, financial saving, etc. The past six months provides an example of how the argument might go. Since October 1996 the krona’s effective exchange rate has weakened by about 7 per cent. Most of this change stems from the appreciation of sterling and the US dollar against currencies in continental Europe (Diagram 6).
The third is that the Bank of Thailand will begin integrating the depository system as well as the clearing and settlement system for all debt instruments with the TSD under a multi-year migration plan. This is aimed at enhancing market efficiency and reducing transaction costs in the debt market. The integrated system will also provide an important foundation for future regional linkages of the clearing and settlement system. Fourth is the development of hedging instruments. With the current upward trend in domestic interest rates, hedging instruments particularly interest rate swaps will provide the bond market with additional instruments that will be useful in an environment of market volatilities. The interest rate swaps market can help diversify and reallocate risk among various groups of bondholders. The fifth focus is our plan to improve the functioning of primary dealers as market makers. This is to say that their obligations and privileges will be reviewed so that they will be in a strong position to perform their functions as market makers. And the sixth is the ongoing project to strengthen the regional bond market through the Asian Bond Funds Project. For the past years, development of the local and regional bond markets has been given an unprecedented emphasis by various regional fora. The most notable is the launching of ABF1 project by eleven EMEAP central banks. That efforts is now being followed by the ABF2 project.