urban backstrom : the current situation for monetary policy speech by mr urban backstrom, governor of the sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, before the standing committee on finance, stockholm, on 10 october 2000. * * * it is gratifying to be able to note, as on so many of my previous appearances here, that economic developments in sweden are impressive. having achieved a growth rate in the past six years that averages 3 %, it seems that our economy is now expanding at an annual rate of around 3 to 4 %. employment has really taken off. to date this year the number of people in work is 70, 000 higher than in the same period of 1999. i can also note, once again, that notwithstanding the rapid economic growth, the rate of inflation has remained moderate. but these favourable developments do not mean that the riksbank can sit back and relax. the path ahead contains a number of risks to which we must be alert. what lies behind the favourable economic trend? a basic factor behind the swedish economy ’ s favourable path is, in my opinion, the economic policy realignment that has been carried out in the past decade and a half. credit and currency markets have been deregulated, the tax system has been reformed, components of the transfers system have been modified and competitive pressure has increased. all this has helped improve the workings of our economy. then there is economic policy ’ s commitment to stability, with price stability as a statutory objective, as well as a successful consolidation of the government finances. in the inflation forecast we are presenting today, productivity growth is judged to be marginally higher than we foresaw in the june forecast. that in itself is a sign that the economy is functioning better. the riksbank ’ s assessment of productivity has been revised gradually over the past few years. higher productivity means that more can be produced with the same input of resources. so a lasting improvement raises the economy ’ s potential long - term output. the higher productivity growth does not seem to be solely connected with the economy ’ s upward phase. whereas productivity growth in the period from 1974 to 1993, for example, averaged less than 1. 5 % a year, the average rate since 1994 has been almost 2 %. at the same time i want to underscore that there are not yet any clear signs of the kind of accelerating productivity growth which has occurred in the united states. one

also clear signs that the swedish labour market was about to cool down and my view was that the weak productivity growth indicated that companies ’ demand for labour could decline. this indicated that there was no great risk that the rate of wage increase would accelerate more than anticipated. this was the combined reason why i did not wish to rule out the possibility of a cut in the policy rate later in the forecast period. for my part i considered it important to ensure, when making the interest rate decision that the strong price impulses from the world market do not push up inflation expectations lastingly and through second round effects lead to higher permanent inflation. however, there is considerable uncertainty as to how commodity prices in the world market will develop and what consequences this will have for inflation and monetary policy. let me explain this reasoning. relative prices are only important to monetary policy if they influence inflation … since last autumn swedish food prices and oil product prices in the cpi have increased rapidly. in april this year food prices had risen by around 6 per cent compared with the same month last year. they thus contributed around 1 percentage point in april to the cpi inflation, which amounted in total to 3. 4 per cent. oil product prices contributed a further 0. 3 percentage points. the upswing in swedish food prices mainly reflects the rapid price increases in the world food commodities market over the past year. despite the turbulence in the financial markets and weaker growth in the world, food prices in the world market have increased by 60 per cent ( expressed in usd ) since the end of 2006. 1 prices of many goods have reached record high levels, including prices of soya beans, maize and wheat. the oil price has also constantly reached new record levels in recent years. in the world market we have nevertheless been able to see a slightly calmer development in the price of some food commodities. the price of wheat has fallen. according to the chicago stock exchange, the forward price in dollars fell by 30 per cent between mid - march and the end of april. but the price is still slightly above the average for last year. one factor contributing to the decline in the price of wheat is that the ukraine has eased its restrictions on wheat exports. the price of rice has also fallen very recently, while maize prices have according to the economist's commodity price index for food. continued to rise. 2 in total, food prices have fallen slightly in recent months, but are expected to remain at high levels in the future. 3 what significance does the fact