The effects of the high demand for certain commodities from rapidly-growing economies are something that central banks around the world must manage in the future. Another example is the imbalances in the global economy. Access to credit was too high for a long time in many countries and contributed to an unsustainable development. The imbalances that were built up are being corrected, but it is still uncertain how long the adjustment will take. What we see now is a world less stable than we have been seeing in recent years. Sweden is a small open economy and the Riksbank conducts an independent monetary policy. We have an inflation target which we endeavour to attain. An inflation target becomes an even more important anchor for monetary policy in a situation like the present one. If financial imbalances and large fluctuations in commodity prices create global shocks over a long period of time, the inflation target can in itself have a calming effect on our own economy. It therefore feels particularly important to maintain our focus on the inflation target right now. The interest rate decision In connection with the Executive Board’s monetary policy meeting on 3 September, we saw signs that inflation is falling in various parts of the world. But this fall in inflation is from a very high level and as yet no clear decline is visible in the statistics. Swedish inflation is still at its highest level since the mid-1990s. At the same time, growth has been weaker than anticipated.
It has revealed the fallout from the failure of large financial institutions. It has revealed the fragility of the financial system to features and trends that cut across institutions, markets and infrastructures. And it has illustrated the amplitude of the consequences of the adverse feedback loop between the financial system and the real economy. All these three elements are key features of systemic risk: first, contagion; second, the buildup of financial imbalances and unsustainable trends within and across the financial system; and third, the close links with the real economy and the potential for strong feedback effects. The crisis has revealed the fundamental importance of systemic risk. Of the three elements I have mentioned, contagion and the link to the real economy are the least novel in the current episode. The most unexpected element has been the rigour with which systemic risk has been triggered by the collective behaviour of financial institutions and the ways in which they interact in financial markets. The main new avenue to explore is therefore to improve our understanding of interconnectedness in the financial system, both via the direct links between financial institutions and the indirect ones created in financial markets. Everybody now sees that major risks can emerge from within the financial system itself. It was not the real economy that threw the financial system into disarray, but the reverse. BIS central bankers’ speeches  3  Endogenous risks – risks that emerge from within the financial sector – can have many causes.