A key determinant of those effects will be the impact on inflation expectations. If households’ and businesses’ expectations of future inflation rise following the initial price shock, pressures for compensating rises in wages and prices are much more likely. Inflation expectations are difficult to measure, but surveys of households’ expectations have picked up since early 2005 (Chart 12). This partly reflects the rise in inflation during 2005-06. But expectations have remained elevated during 2007 despite the easing in inflation in the second half of the year. Conclusion After a long period of stability, we have experienced a major financial shock that has reverberated through the banking sector in all the advanced economies. It has calmed recently, but we should expect a prolonged period of discomfort for individual banks and the financial system as a whole. Unusually, this shock was not the result of bad loans at home  11  Evidence on housing equity is presented in Waldron, M and Young, Y (2006), “Household debt and spending: results from the 2007 NMG Research survey”, Bank of England Quarterly Bulletin, Winter, pp. 512-21. BIS Review 7/2008  5  but it will have an impact on growth through tighter credit constraints and by influencing expectations and confidence. We cannot be sure how large those effects will be but they pose a serious downside risk to growth. To make matters more difficult, we face a sharp rise in inflation in coming months as a result of rising commodity prices worldwide and a fall in our exchange rate.
Mr Bäckström discusses the Swedish economy in the 21st century  Speech given by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at the Swedish Shareholders Association, held in Gothenburg on 22 November 1999. *  *  *  First a word of thanks for the invitation to Gothenburg to discuss the Swedish economy in the 21st century. A week or so ago the Riksbank raised the repo rate from 2.90% to 3.25%. The decision was based on the assessment of inflation prospects we had presented in the October Inflation Report and our analysis of economic statistics that had subsequently become available. By raising the instrumental rate now, we aim to contribute to the continuation of a favourable economic trend, with stable prices and sustainable growth. We made the increase somewhat larger than was expected so as to be in a position to leave the repo rate unchanged for the rest of this year, given that the Swedish economy follows the path predicted by the Riksbank. Under these circumstances there is no point in dwelling on current monetary policy and its conditions. Instead I shall be considering a couple of matters to do with growth conditions for the Swedish economy in the longer run. This has a topical flavour on the threshold of a new millennium, perhaps particularly so at a time when so much discussion refers to the so-called new economy.