I would also like to emphasise today that regulation needs to adapt to the evolving financial system. In that vein, I will discuss what remains to be done in developing macroprudential and other policy tools in response to evolving risks in the investment fund sector. Financial stability risks in the euro area In the euro area, we have now seen 22 consecutive quarters of economic growth and declining unemployment – a development which has also been bolstered by our accommodative monetary policy and which has supported financial stability overall. Notably, banks’ profitability has improved somewhat, though it is still at low levels, and they now have higher capital and liquidity ratios, making them more resilient than they were before the global financial crisis. Indeed, the results of the recent EU-wide stress test show that the banking sector has a good level of resilience overall, albeit with some pockets of vulnerability. However, while the fundamentals for solid growth rates over the next two years are still in place, some risks are building up in the financial system. We are currently paying particular attention to three major developments that could trigger financial stability concerns globally and in the euro area. First, the current expansion of the US is now significantly longer than historical norms and the second longest in US modern history. Looking ahead, a down-turn in the US macro-financial cycle could trigger a reassessment of riskier asset classes.
The way the term ”normalise” is used in this context usually means that the policy rate is being increased after having been very low for a period, that is, it is simply a way of pointing out the natural direction for the policy rate in future. At the same time, there is an implication in the term “normalise” that there is a level for the policy rate where it normally should be. Some analysts appear to have interpreted this to mean that the Riksbank’s increases in the repo rate point reflect that there is an end in itself to achieving such a "normal" level now that the economic upturn is well established and most curves are pointing upwards, quite regardless of how inflation may develop. However, this is not the way we reason. The fact that the interest rate is below the "normal" level is not in itself a reason to increase the rate, even if real economic developments are favourable. It is not an argument that can stand for itself. The decisive factor for future interest rates is the result of our forecasts and assessments of inflation and economic developments as a whole. It may be the case, for instance, that different factors are expected to hold back inflation over a relatively long period of time and that there may thus be reason, even in an economic boom, to allow interest rates to “normalise” – if we are to use this term – at a slower rate than would otherwise be justified.