made in the functioning of the economy since then. i would claim that wage formation has been an important element of this and i intend to explain this in more detail in my speech today. at the end of my speech, i also intend to give you my personal view on a question that has emerged in the wake of the latest round of collective bargaining, namely which sector should reach an agreement first and thus set the norm for wage increases in other sectors. however, perhaps the first question that should be asked is why the riksbank should show any interest at all in the functioning of wage formation. wage formation and monetary policy are interrelated. the riksbank is not a party in the collective bargaining process. it is the social partners that conduct collective bargaining. but the development of wages affects inflation and inflation affects the development of wages. our job is to maintain a low and stable level of inflation. this job is made easier if wage formation works well. my speech today can be summed up in the following four points : • wage formation has functioned better in the last fifteen years than in the 1970s and 1980s. • cost increases are higher in the current agreement period than in the preceding agreement periods. • the economy is weakening, inflation is falling rapidly and the riksbank is reducing the interest rate. • the sector that is exposed to international competition should also set the norm for wage development in collective bargaining in 2010. the speech is structured in line with these four points. i would also like to make it clear that the views on wage formation that i express in this speech today are my own and are not necessarily shared by my colleagues on the executive board of the riksbank. wage formation in a longer perspective high wage increases and devaluations in the 1970s and 1980s i think that every one here would agree that wage formation has functioned better in the last fifteen years than in the 1970s and 1980s. one way of illustrating this is to compare the development of inflation in sweden and germany. in the 1960s, inflation was on average just over one percentage point higher in sweden than in germany. following the breakdown of the bretton woods system in the early 1970s, inflation in germany was seen as a nominal anchor for inflation in sweden in that the swedish krona was pegged to a currency basket dominated by the d - mark. this strategy did not work. during the 1970s and 1980s, inflation in sweden was on average more than four percentage points higher than in germany ( see figure 1 ).

the bargaining rounds were good. wages had increased moderately in the preceding years and there was spare capacity on the labour market. secondly, wage formation had improved since the crisis at the beginning of the 1990s. thirdly, the monetary policy framework had improved and thereby the conditions for maintaining low and stable inflation. the public's expectations were that inflation would be around the target of 2 per cent per year. at the same time, my assessment was that the risks were on the " upside ", that is that it was possible that wage increases could be higher. there was strong growth in the economy and employment was increasing rapidly. despite the positive experience of the preceding years, there was a possibility that the rounds of collective bargaining could be much less straightforward than expected. market forces could also push up the rate of wage increases to higher levels. i became more concerned when the content of the agreements became apparent. the levels of the agreed wage increases were significantly higher than in the preceding rounds of collective bargaining. the outcome was similar to the risk scenario that we presented in a monetary policy report in february 2007 before the collective bargaining process began. this undermined the possibility to conduct a relatively expansionary monetary policy with low interest rates and still reach the inflation target. somewhat higher wage increases in 2007 - 2009 than in the preceding agreement period in february 2007, the riksbank's assessment was that hourly wages would increase by 3. 9 per cent per year in the three - year period 2007 - 2009. when more information on the result of the rounds of collective bargaining became available in june 2007, this assessment was increased to 4. 2 per cent per year. my personal belief was that hourly wages would increase more than this. since the spring of 2007, the development of the economy has been much weaker than we expected. the crisis on the financial markets has entailed a dramatic downturn in the us economy which has had a dampening effect on economic development in other countries, including sweden. this can in turn have made the companies more cost conscious and less willing to employ new personnel and increase wages above the levels stipulated in the agreements. it is therefore reasonable to assume that there will be lower wage increases during the threeyear agreement period than we could predict in 2007. our assessment now is that hourly wages will increase on average by 3. 7 per cent per year during the three - year period 20072009 measured using the national mediation office's method for presenting statistics, and by three tenths more using the method