Or it could be that the spare capacity is exerting little downward pressure, because businesses with limited access to credit are unwilling to run the risk of reducing their cash flow by cutting prices in order to boost market share. Moreover, even though pay growth has been muted, unit wage costs have nevertheless risen quite sharply because businesses have held onto skilled labour through the recession, rather than lay it off. So the firmness in underlying prices may just be the flipside of the better-than-expected labour market outturns. Despite these uncertainties, it seems likely that the margin of spare capacity will be sufficient to pull inflation back towards the 2% target from its present elevated level, as the near-term effects of the restoration in VAT and sterling’s past depreciation work through. Our latest projections, contained in the February Inflation Report, are shown in Chart 9. The risks of inflation being above or below the target are roughly balanced by the end of the forecast horizon. It should, I hope, be clear from my remarks that, although a recovery of sorts may have commenced, there are still considerable doubts about its strength and durability and about the accompanying path of inflation. The road ahead is likely to be bumpy and there is still the risk of further adverse shocks.
At the same time it is important to set the interest rates in a way that avoids directly subsidising the bank system. In addition to the Riksbank’s measures the Swedish banks have received other forms of support during the financial crisis. They have also been able to borrow from other central banks. As part of the government’s stability package, with effect from December 2008 financial institutions can apply to have their borrowing guaranteed by the government through the Swedish National Debt Office. At present nine financial institutions have received loans amounting to just over SEK 300 billion with such guarantees. All in all, the bank lending supported by the Riksbank and by the Swedish National Debt Office amounted at most to almost SEK 800 billion in July this year (Figure 10). BIS Review 160/2009  9  Figure 10 The Riksbank’s lending and government-guaranteed borrowing SEK billion 900 800  900 Emissions guaranteed by the Swedish National Debt Office The Riksbank's lending  800  700  700  600  600  500  500  400  400  300  300  200  200  100  100  0 Jul-08  0 Oct-08  Jan-09  Apr-09  Jul-09  Oct-09  Sources: The Swedish National Debt Office and the Riksbank. To summarise, the measures to safeguard financial stability during the financial crisis were mainly aimed at quickly providing the banks with wide scale funding in SEK and USD.