We make it clear in the Inflation Report that we consider the risks of a poorer development in Swedish and international economic activity to have declined as the recovery has progressed. Experience also shows that it is easy to underestimate the force of an upturn once it has found a foothold. Developments in the labour market in both Sweden and the United States are one factor pointing in the other direction. In addition, developments in the euro area remain sluggish and in the United States there are problems with imbalances in foreign trade in particular. Our opinion is nevertheless that, compared with the picture we present in the main scenario, there is an upside risk for inflation from economic activity in Sweden and abroad, with links to price trends. There are arguments that we could have either overestimated or underestimated cost pressure. Compared with the December assessment, we have revised up our basic view of productivity, although there is considerable uncertainty in this area, given the surprising developments over the past six months. On the other hand, the uncertainty regarding wages has diminished somewhat, as central wage agreements have now been concluded for a large part of the labour market. All in all, our assessment is that the risks in this field are balanced.
In a comparison with a number of other inflation-targeting countries, it is evident that Swedish inflation was closest to the target level last year, measured as an annual average, and that it was fairly average with regard to deviations from the target level. As monetary policy’s effect on inflation has a time lag, the outcome of inflation in 2003 is largely a result of the monetary policy conducted in 2001 and 2002. Let me therefore report some of our considerations in the light of the developments and forecasts made then. At the beginning of 2001 the repo rate was 4 per cent. During the spring there was a severe depreciation of the krona. Despite the fact that economic activity in Sweden and abroad was in a weakening phase, domestic resource utilisation was at a high level, while inflation had increased significantly during the spring and exceeded the upper tolerance limit. Inflation expectations had also begun to rise. Given this, we raised the repo rate in summer 2001. Economic developments and monetary policy considerations in Sweden differed from those in many other countries, where monetary policy in many cases had begun to be more expansionary. The decision to raise the interest rate in July 2001 was not self-evident. Three Executive Board members entered reservations against the decision, with reference to the weakening economic activity. The terrorist actions in September 2001 caused us to cut the rate by half a percentage point. Our assessment was that confidence among both households and firms would deteriorate.