If the Riksbank judges that inflation will rise above the 2 per cent target, it is up to us to raise interest rates. Consequently, excessively high wage increases will not lead, except possibly in the very short run, to higher inflation. Instead they will result in weaker economic activity and lower employment in the years ahead. In the earlier situation with a fixed exchange rate, excessively high wage increases primarily affected manufacturing and other parts of the economy that are exposed to international competition. Today the effects will be felt in particular by sectors that are sensitive to interest rates, such as distributive trades and a debt-burdened public sector. BIS Review 96/1997  -54. Conclusions for monetary policy The overall assessment in the inflation report is that the monetary stance is well balanced. Today there is no reason to modify that conclusion. In the past month there has been no appreciable change in the outlook for inflation. After the interest rate increases in Germany and other countries almost a week ago, many people have asked how this affects the Riksbank’s actions. As stated already on several occasions, the answer is: not much as long as the conditions for inflation have not changed. The Riksbank targets inflation and it is this target that guides policy. In view of what has happened in the past month, there is reason, finally, to highlight a couple of points in the report. The first is that monetary policy is being conducted against the background of an economic upswing.

Above data suggests that in the long run low ability to generate innovation combined with low value added FDI may harm the CEE ability to improve productivity. Summing up, with the inflation headwind expected in the coming few years CEE central banks will face a possibly steep sacrifice ratio when controlling inflation. Keeping inflation at the target consistent with EMU accession may require sizeable reduction of the output gap, which in turn may make fiscal targets difficult to achieve. Tail wind of globalization appears to be fading in the coming few years and if agflation or surge in other commodity prices materializes, joining EMU may become “mission impossible” for many CEE countries in the next few years. The window of opportunity created by global inflation “tail wind” might have closed in 2007. References Freeman R. (2005) “The Great Doubling: America in the New Global Economy”, Usery Lecture, April 8, 2005. Georgia State University; What Really Ails Europe (and America): The Doubling of the Global Workforce, The Globalist, June 3, 2005 IMF (2000) “Globalization: Threat or Opportunity?” IMF Staff, April 12, 2000 (Corrected January 2002) McKinsey Global Institute (2005) “The Emerging Global Labour Market”, June 2005. Rogoff K.S. (2006) “Impact of Globalization on Monetary Policy”, Federal Reserve Bank of Kansas City Rybinski K. (2007) “Three faces of globalisation. Offshoring – global imbalances – monetary policy”, Difin, Warsaw 2007 (in Polish) Spiegel online (2007), “Rethinking Renewables: Biofuels Emit More Greenhouse Gases than Fossil Fuels”, http://www.spiegel.de/international/europe/0,1518,508089,00.html  4  BIS Review 137/2007