When the oil price reaches record high levels it creates a further incentive to increase the production of biofuels at the cost of food. The IMF observes in its most recent report that biofuels account for only 1.5 per cent of the supply of liquid energy. But the use of these fuels led to demand for crops used in their production doubling between 2006 and 2007. 5 In the slightly longer term the high food prices lead to the supply of food increasing and this dampens prices. But there are also factors that could hold back supply and mean that it does not increase as much as would be necessary to meet the increased world demand. Some supply shocks are of a temporary nature, such as the drought in Australia last year and poor harvests in some regions. One cannot rule out the possibility that climate effects have played a role, and in this case such shocks may be a recurring problem. 6 Another factor that has had a restraining effect on supply and has thereby contributed to boosting the increase in world food prices is the export restrictions introduced by some countries that are major producers of food, in an attempt to protect their domestic consumption from the price increases. The effect on the price of wheat when export restrictions were reduced in the Ukraine is, as I mentioned earlier, a good example of how this can have tangible effect on prices. Another factor that has certainly been significant is the depreciation of the dollar.
If we do not tighten monetary policy enough, there is a risk that inflation will gain a foothold at a high level, and that it will be necessary to raise the policy rate even higher at a later stage to reduce inflation. On the other hand, if we raise the policy rate too much, we might dampen the economy more than necessary, which is something we want to avoid. We believe that we can achieve an appropriate balance of these risks by raising the policy rate by 0.25 percentage point now. Let me a say a little more about the background for the policy rate decision. New forecasts have not been prepared for this monetary policy meeting, but we have assessed new information against the projections we presented in September. Chart 2: Gas and electricity prices have declined  1/3  BIS - Central bankers' speeches  Prices are rising rapidly among our trading partners, and inflation has been higher than projected in the previous Monetary Policy Report. But both gas and electricity prices have recently fallen from high levels. Global freight prices are still high but have fallen recently and more than we had anticipated. Many central banks have responded to the surge in inflation by raising policy rates further in recent weeks, and policy rate expectations have increased. Higher interest rates could lead to slower growth ahead than we projected earlier. Chart 3: Unemployment is low Domestic activity was higher through the summer months than assumed earlier. Household consumption has been higher than expected.