lars e o svensson : monetary policy and employment – monetary policy is too tight speech by prof lars e o svensson, deputy governor of the sveriges riksbank, to the swedish trade union confederation, lo, stockholm, 16 january 2013. * * * i would like to thank karolina ekholm, gabriela guibourg, kerstin hallsten, per jansson, kerstin af jochnick, pernilla johansson, ulf soderstrom, staffan viotti and anders vredin for useful comments and discussions. anna lidberg and marianne sterner have contributed to this speech. the views expressed here are my own and are not necessarily shared by the other members of the executive board of the riksbank or by the riksbank ’ s staff. monetary policy is too tight in sweden although i am myself a member of the executive board of the riksbank, it is hardly a secret that i see major problems with swedish monetary policy. in a shorter - run perspective one can note that both cpi and cpif inflation are now significantly below the inflation target of 2 per cent, and that unemployment is way above a reasonable long - run sustainable rate. there is no doubt that monetary policy has contributed to this, in that it has been too tight since the riksbank began raising the policy rate in the summer of 2010. this may of course sound strange given that the policy rate is at a historically low level. but both short and long nominal and real interest rates have shown a negative trend since the mid - 1990s and have fallen in sweden and the rest of the world. this makes it misleading to now make direct historical comparisons of the level of the policy rate. the fact that monetary policy has been and still is too tight becomes clearer when one sees that the policy rate and the short real rates in sweden have been raised since 2010, and then have been kept high in comparison with policy rates and the short real rates in the euro area, the united kingdom and the united states. this is despite the fact that inflation in sweden is significantly lower than in these economies while unemployment is about as high as in the united kingdom and the united states ( figures 1 – 3 ). after having been close to the target in early 2010, cpif inflation in sweden has also since trended downwards to a rate of one per cent or below. 1 average inflation too low and average unemployment unnecessarily high since 1997 in a longer perspective, one

the economic expansion in china has now been in progress for a number of years, and together with the recovery in the japanese economy it contributed to high growth in several asian countries last year. growth in the euro zone has been relatively weak, but last year there were signs that economic activity was beginning to improve there, too. at the same time as growth in demand in the world economy has been strong, price pressures have been held back. although oil and other commodities have become significantly more expensive for consumers, the general price increases have been relatively small on the whole. this can probably be partly explained by increasing international competition. the upswing in global economic activity has also characterised developments in the swedish economy, which has grown strongly in recent years, with the exception of a slowdown at the end of 2004 / beginning of 2005. despite the good growth in demand, inflation has been low in sweden. this is largely attributable to import prices excluding oil developing weakly and to cost pressures being held back, partly by the strong productivity growth and low capacity utilisation. the development we envisaged in the february inflation report was that international growth would continue to be good. there were some question marks regarding developments in the united states and in the euro area, where preliminary statistics for the fourth quarter of 2005 were surprisingly weak. our assessment was that this could largely be explained by transient factors and that the upswing could nevertheless continue, although possibly at a slightly slower rate. our assessment for the swedish economy was that domestic demand would be strong over the coming years, with gdp growth peaking in 2006. the forecasts indicated that household consumption would rise and investment would continue to increase, but at a slightly slower rate than last year. we also envisaged continuing strong exports as a result of the good international activity. with regard to the labour market, we could observe an apparent upturn in demand for labour and that there were many indications that employment in terms of both persons in employment and of hours worked would increase further. economic resources were expected to become increasingly strained and the rate of wage increase to become gradually higher. however, we assumed nonetheless that the increase in cost pressures would be relatively moderate as a result of continuing good productivity growth over the coming years. all in all, inflation was expected to rise, although at a modest rate, as a result of dampening effects from the developments in productivity and import prices. our forecast was that underlying inflation would rise gradually and approach the 2 per cent target a couple of