I am confident it can be a “success story”. Nonetheless, substantial challenges remain. Ambitious structural and financial reforms are still needed: to put unemployment on a downward trajectory; to ensure that government finances are put on a sustainable path; and to secure a banking sector that can stand on its own feet again and support the Irish economy. BIS central bankers’ speeches  1  And that last item – financial sector repair – is absolutely crucial. The support from the Eurosystem in the form of monetary policy and emergency liquidity loans to Irish banks has been extraordinary by any measure. With these considerations in mind, I would like today to start by considering, first, the origins of the crisis. I will then discuss some macro-fiscal aspects of the adjustment process. However, I want to spend the majority of my remarks discussing, thirdly, financial sector issues and the role of the ECB. I would like to present a clear view on how the ECB has supported Ireland through the adjustment process, working as a true partner to help this country resolve its problems. 1. The origins of the crisis  A somewhat colloquial, description is that when the bubble burst, the economy was lacking competitiveness, that it was unfit and overweight. Is that really a fair description of the Irish economy around 2007?
The Riksbank has defined this in terms of a target for inflation: to keep inflation at 2 per cent, with a tolerance for deviations of ± 1 percentage point. In practice the Riksbank’s conduct of monetary policy normally involves adjusting the repo rate with a view to influencing demand in the economy. By influencing borrowing costs, the incentives to save, exchange rate developments and thus exports and imports, etc. the repo rate has an effect on aggregate demand in the economy and gradually also on inflation. It is generally held that a rate adjustment normally takes roughly 1-2 years before it has its greatest impact on inflation through these different "channels". That means that our interest rate decisions must be based on a forecast of economic and inflation developments in the years ahead. Even though the current inflation rate is not the decisive factor for our interest rate decisions it is, of course, important nonetheless since it constitutes the starting point for our inflation forecast, which is the key element underpinning our decisions. To make the Riksbank’s monetary policy strategy clear it has been described in terms of a simple policy rule: if the forecast points to an inflation rate above 2 per cent 1-2 years ahead the repo rate should normally be raised, whereas it should normally be lowered if inflation is forecast to be below 2 per cent. BIS Review 25/2005  1  But this policy rule cannot be applied mechanically. That is why “normally” is included in the wording.