lars nyberg : the repo rate - spring 2002 speech by mr lars nyberg, deputy governor of sveriges riksbank, to the swedish taxpayers ’ association in malmo and kristianstad, 22 april 2002. * * * i should like to begin by thanking you for the invitation to this discussion and the opportunity to develop some ideas on the swedish economy as it looks in spring 2002. i shall start with the riksbank's most recent executive board meeting on 18 march, where we decided to raise the repo rate by 0. 25 percentage points to 4. 0 per cent. it may seem as though the interest rate hike did not come at the most appropriate point in time, as economic activity is still weak. why did we raise the rate so quickly and before most other central banks had done so? moreover, we, in common with most of the analysts in the market, expect the inflation rate to fall during the spring. why did we raise the repo rate when inflation is on its way down? these are questions that i shall try to answer today. some analysts also consider that the riksbank has made a sudden u - turn in its assessment of inflation and so i thought i would explain a little about how our view has changed and why. however, it was not actually a major change and cannot really be regarded as a total u - turn. why was the repo rate raised when inflation is on its way down? the riksbank has been given a statutory task of maintaining price stability and promoting a safe and efficient payment system. the riksbank has specified the monetary policy objective as a rate of increase in consumer prices, measured as cpi inflation, of 2 per cent, with a tolerated deviation interval of plus / minus one percentage point. the most important instrumental rate, the repo rate, is the instrument normally used by the riksbank to maintain price stability. our monetary policy strategy can be described in a simplified manner using the rule of thumb that when an assessment indicates that inflation one to two years ahead will deviate from the target level, the instrumental rate is adjusted. the riksbank's assessment of future inflation is communicated, for instance, in the inflation reports published four times a year. the riksbank has chosen to maintain the inflation target in a medium - term perspective. one reason for this is that monetary policy affects inflation with a significant time lag. an attempt to ensure that inflation also develops in line with the target

absence due to sickness. the picture of employment is nevertheless rather divided. the number of jobs in the manufacturing industry has declined markedly, while jobs in the public sector and the service industries have increased. given this, the situation on the labour market is of particular interest. it appears to be relatively constrained, considering that we are at the end of an economic downturn and wage increases have also been slightly higher than expected, particularly in the construction sector and the service industries. as the level of employment has been retained, despite the decline in demand, productivity has shown a weak development, particularly in the services sector. to some extent, the effect of companies'higher costs has not had an impact on prices, but instead led to falling profit shares. however, it now appears that the demand situation has enabled companies to shift a larger part of the cost increases onto consumers. so, how come wage increases have been higher than expected? one possible explanation may be that the resource utilisation in the economy has been higher in recent years than we had earlier believed. a strained resource utilisation means quite simply that the total demand is high in relation to the production capacity of the economy. this is usually revealed, for instance, in rising wage increases and higher underlying inflation. in the inflation report presented on 19 march 2002, we have made a slight upward revision for resource utilisation. this means that we believe that there are now, and will be in future, less available resources that can be used without price and wage increases accelerating. inflation above the target level looking at inflation, it is primarily the underlying rate that has been surprisingly high. the largest rise has been in prices of services. here, the relatively high resource utilisation in the services sector has contributed to rising labour costs. in addition, prices of input goods, such as electricity and foodstuffs, have risen. given the developments in prices and wages over the past year, the riksbank has gradually altered its view of the inflation propensity in the swedish economy in a broader sense. a higher resource utilisation, together with rapid wage increases and a weak exchange rate, have led to slightly higher inflationary pressure than in previous assessments. it is this gradual shift that has sometimes been referred to as a total u - turn. recent events since the most recent executive board meeting, new statistics have been received that largely confirm the picture of the swedish economy painted by the riksbank. in my opinion, there is no reason,