In view of the high growth rates in recent years and considering that we had moved towards a situation where resources were becoming increasingly strained, we in the central bank concluded last autumn that it would be healthy for the Swedish economy if activity were to slow down somewhat to a more sustainable rate. In principle, an economic slowdown to a more sustainable growth rate can happen either as a spontaneous slackening of activity, for instance coming from an international disturbance, or via a monetary policy adjustment, or from a combination of the two. For a while now there have been clear signs of a slowdown in the U.S. economy. In the Euro area, too, activity has been somewhat weaker than expected. In Japan it looks as though a recovery will be further delayed on account of the problems that have already beset the country for a long time. Moreover, the weaker growth in the United States may have a regional effect on Southeast Asia. Accordingly, it is now becoming increasingly clear that a global economic slowdown is tending to adjust the expansion of demand in the Swedish economy towards a more sustainable growth path. However, it remains to determine the extent to which the international slowdown will sufficiently dampen the previous unduly rapid expansion in the Swedish economy. On the other hand, it cannot be ruled out that the downturn in the U.S. economy will be more pronounced than various observers count on at present.
Although we are also able to influence inflation in the shorter run, doing so is normally inappropriate because it is liable to result in large fluctuations in production and employment. Of course the rule is not applied mechanically. The basic intention is to stabilise inflation around the target and at the same time avoid unduly large fluctuations in production and employment. We tend to disregard economic shocks with effects on inflation that can be assumed to be only transitory. Moreover, there may be grounds for heeding the expected course of events beyond the regular target horizon. There may be a case for adjusting the repo rate immediately if there are already strong reasons for expecting a marked increase or decrease in inflation directly after the two-year horizon. Another point to remember is the Riksbank's mandate to promote a safe and efficient payment system; problems in this context may call for interest rate adjustments even though the inflation target is not threatened. Such adjustments may be needed both to prevent potential risks from building up in the payment system and to moderate effects of problems that have already arisen. However, departures of this type from the normal decision rule should be made restrictively. Moreover, deviations should be stated clearly, and carefully justified. Favourable economic development over several years Under the new regime the Swedish economy has experienced several years of strong growth. Since the upturn began in the summer of 1993, the annual GDP growth rate has averaged around 3 per cent.