henry ohlsson : the inflation target – a benchmark for price - setting and wage formation speech by mr henry ohlsson, deputy governor of the sveriges riksbank, at a conference, organised by facken inom industrin, balsta, 16 april 2015. * * * accompanying charts can be found at the end of the speech. i would like to begin by thanking you for the invitation to take part in this conference. it ’ s a great pleasure to be here. many faces are familiar after my 18 years on the economic council of swedish industry, while others are new. my own role is also new, the post of deputy governor of the riksbank is an honour and carries great responsibility, but is also very interesting. it feels particularly appropriate to be holding my first speech in the role of deputy governor of the riksbank in a context closely linked to wage formation. my subject today is why the inflation target is so important for smoothly - functioning price - setting and wage formation. the swedish labour market is about to enter into large - scale wage bargaining rounds. several hundred collective wage agreements will expire in the first part of 2016. as always, the outcome of future wage bargaining rounds is important for the parties directly concerned. this essentially concerns both companies ’ competitiveness and employees ’ purchasing power. thus, the significance of the agreements extends across the entire economy. in the traditional swedish model, different agents have clear roles. the social partners are responsible for wage formation through their negotiations. in recent decades, the sectors exposed to international competition have led the way and set the standard, as it were, for the rest of the labour market. i firmly believe that the outcome of this system has been positive. the industrial agreement has played an important role. in other words, the inflation target and the industrial agreement have worked well together. the inflation target contributes to smoothly - functioning price - setting and wage formation the role of the riksbank is and always has been to be responsible for monetary policy. monetary policy is conducted with the aim of ensuring that the annual rate of inflation is 2 per cent. it is important to have a benchmark for expectations in the economy and thereby lay the foundations for efficient price - setting and wage formation. its purpose is to enable economic agents to plan long - term, for instance, with regard to wage negotiations. in other words, the inflation target makes it easier for households and companies to make good economic decisions. it creates the

action, which may even include new legislation, for instance on bank resolution. to detect such a crisis may sound easy, but is in practice very difficult. for instance, when does a gradual increase in asset prices actually turn into an unsustainable bubble and no longer constitute a reflection of fundamental values? look at the housing markets in some countries around the world right now. are there bubbles and, if so, where are they? another problem is timing. at what point should the central bank sound the warning bell? by acting too early, we might add to the volatility in the market place and hence worsen the situation. remember that the central bank will be held accountable for the negative repercussions of pricking the bubble, not only for the potential but less tangible benefits of having done so. by acting too late, on the other hand, we do not fulfil our mandate and a full - blown crisis might not be prevented. in addition to the problem of timing, there is the problem of selecting an appropriate response to the threat. the first line of defence is moral suasion, i. e. trying to convince the banks and other market participants to act in a proper fashion. the problem with moral suasion is that it may be difficult to calm a market that is rushing to new heights. still, by publishing financial stability reports and issuing warnings to relevant parties, it should be possible to influence the public discussion. the second line of defence is prudential regulation. discussions could be held with the supervisory authority and the ministry of finance on solutions, such as stricter formal regulations, calls for improved risk management systems or other conditions in order to strengthen banks. a good example is the hong kong monetary authority, which, in a situation of unrealistic property prices, used its power to gradually lower the loan - to - value ratio of property collateral in order to limit bank lending. a third line of defence of course is the use of monetary policy, which in practice probably means raising interest rates to prick a bubble. this, in my view, should clearly be an option. but there are also some strong arguments against a central bank trying to respond to asset prices and credit expansion by changing its monetary policy stance. and there are certainly situations when it is unlikely to work. i shall have to leave this issue for now, however, or you will have to listen to me for another hour. conclusion let me conclude by saying that much has been done