the krona had weakened significantly following the mexico crisis and the budget consolidation process was not yet complete. there was a risk that inflation might accelerate again, partly because of a sharp rise in producer prices in the wake of the krona depreciation. the swedish trade union confederation's attempts at coordination in wage bargaining failed, while the employers were calling for decentralised wage formation. 1995 proved to be a year filled with conflicts. the agreed wage increases came out at an average of around 3. 5 per cent a year during the agreement period 1995 - 1997, while the average rate of wage increase was just over 5 per cent. the increase in productivity during the same period was 1. 8 per cent a year. wage development was thus scarcely compatible with the inflation target of 2 per cent. at the same time, open unemployment remained high. during the wage agreement period 1995 - 1997 open employment was over 8 per cent. the bargaining rounds in 1995 cannot therefore be considered a success from the economy's point of view. in 1998 it was time for the next round of central wage agreement bargaining. by then cpi inflation had fallen. the riksbank also raised its repo rate at the end of 1997, partly due to the risk of rising wage inflation. the 1998 bargaining round took place during the aftermath of the asia crisis, while the krona appreciated significantly, which probably had a subduing effect on wage demands in the export industry. these negotiations entailed the herald of a new " saltsjobaden spirit " in the swedish labour market with the signing of the 1997 industrial agreement by twelve employers'associations and seven trade unions in industry. the industrial agreement, which covered approximately 600 000 employees and ran for a period of three years, was meant to provide a foundation for a good wage development by promoting industrial development, profitability and competitiveness. the agreement primarily contained important rules on the system of negotiating, such as rules to reduce the risk of periods with no agreement and to reduce the risk of conflicts breaking out. similar bargaining agreements were signed between the parties in the central government, local and regional government sectors and for white collar workers in commerce. these agreements stipulated that industry should lead the way in wage agreements in relation to other sectors of the economy, an idea that originated in the efo model designed by the swedish trade union confederation ( lo ), the confederation of swedish enterprise ( saf ) and the swedish confederation of professional employees ( tco ) at the end of the 1960s

but so far this year productivity has developed relatively strongly. the rate of increase is expected to be somewhat subdued over the coming two years as an increase in demand occupies a larger percentage of companies'resources. unit labour costs are therefore expected to be halved next year compared with last year, which should check domestic inflation. in addition, we still believe in an appreciation of the krona during the forecast period due to fundamentals, which have subduing effect on imported inflation. it is therefore estimated that payroll expense could increase by an average of just over 4 per cent a year during the forecast period without any threat to the inflation target. however, 4 per cent is too high in the slightly longer term. there is a great risk that this figure will become established as a norm, as payroll expenses have increased by approximately 4 per cent a year over the past five years. if sweden were to participate in stage three of emu, we cannot have a rate of wage increase that deviates from the average in the euro countries. if the " norm " for payroll expense increases is 3. 5 per cent, this means that nominal wage agreements must be signed at lower levels. this is because the scope must also cover wage drift and other wage costs, such as collective fees and reductions in working hours. conclusion in the october inflation report we foresaw a slightly more prolonged economic recovery than had earlier been expected. the weak development in the financial markets in the wake of bankruptcies and accounting scandals had contributed to the start of a decline in confidence from companies and households. in sweden demand had been upheld relatively well, but it was estimated that fiscal policy needed to be tightened up to manage the expenditure ceiling. this means that growth may be more subdued in future. inflation was assumed in the main scenario to be in line with the inflation target one and two years ahead, albeit at the lower edge of the interval. the risks we foresaw for swedish inflation were mainly related to developments in the financial markets and to wage formation. in that situation, we chose to leave the repo rate unchanged and decided to hold an extra monetary policy meeting, which will take place tomorrow. the municipal workers'union's termination in advance of the third year of its collective agreement need not in itself constitute a threat to the inflation target, as long as other groups in the labour market are prepared to stand back in favour ot this union's members. however, if other groups were also to demand higher wages, the inflation target