It is important to have sufficiently developed domestic financial markets, sound macroeconomic conditions and sound institutions in place. Also important is a surveillance mechanism to monitor capital inflows and outflows. Of particular importance is the monitoring of the accumulation of external liabilities by the financial system and the private sector. Advance knowledge of imbalances and risks would facilitate early actions to manage emerging vulnerabilities. An appropriate exchange rate regime Finally, I would like to mention the significant value to national resilience of having an exchange rate regime that is aligned to the economic fundamentals. It is important to understand that the exchange rate is a means to an end and not an end in itself. Its purpose is to provide a fair rate of exchange between goods and services that are produced in the domestic economy with those that are produced abroad. Trade and investment is facilitated by an exchange rate that is stable and reflective of economic fundamentals, not by one that is volatile and unstable and subject to speculative capital flows. The exchange rate should also not be manipulated to cater to narrow sectoral interests. For every change in the exchange rate that benefits one sector, there would be another sector that is disadvantaged. Therefore, the exchange rate policy has to rise above sectoral interests and consider the overall economic implications in deciding on the appropriate exchange rate. It is also not prudent to respond to short-term trends or to focus solely on developments in bilateral exchange rates.
To increase confidence in the long term, however, we  2  This figure may vary somewhat depending on how it is calculated. 3  See also the article “The EMU and the debt crisis in Europe” in the Monetary Policy Report of February 2012. 2  BIS central bankers’ speeches  need real changes and the credible implementation of requirements for sustainable public finances. Nevertheless, the situation looks much better now than it did in the autumn. If we look outside Europe, we can see the beginnings of a turnaround in the US economy and China, for example, is still experiencing good growth. Despite this, however, we should probably expect the impetus to the Swedish economy from abroad to be limited over the next few years, mainly due to weak development in Europe. Inflation and growth prospects justify keeping the repo rate low Developments abroad, and above all in Europe, are thus highly important to the Swedish economy. But the development of domestic demand, for example household consumption, was also weak in the second half of 2011. Since then, however, we have received a number of somewhat more positive signals. Share prices have risen since the end of last year and confidence indicators are clearly pointing in the right direction, although from relatively low levels. There is thus potential for an eventual increase in household demand. Growth may gradually increase. The main objective of monetary policy is to keep inflation close to the target.