Flodén: Monetary policy and wage formation – a mutual dependence
"Inflation below the target for a long period of time is worrying for several reasons. Many of these can be linked to wage formation in one way or another." These comments are made by Deputy Governor Martin Flodén in a speech held at TCO (the Swedish Confederation for Professional Employees) on Thursday. He notes that it has become increasingly important to quickly bring inflation back to higher levels and that the recent repo-rate cut to zero per cent sends a clear signal that monetary policy is focussing on bringing up inflation.
The theme of the speech is the interdependence between monetary policy and wage formation. Flodén points out that wage formation is very important for monetary policy. Strong confidence in the inflation target, so that the social partners' inflation expectations are firmly anchored around 2 per cent, makes it easier for monetary policy to attain the target and also makes it possible for the Riksbank to give greater consideration to the development of the real economy. This creates better conditions for stabilising inflation close to the target and employment at a stable level.
Moreover, he notes that monetary policy at the same time plays an important role in wage formation. The inflation target acts as nominal anchor for wages and prices in the economy. This is reflected, for instance, in the norm-setting discussion that marks central wage bargaining in Sweden and which is to ensure sustainable wage increases. The common starting point of the inflation target also facilitates the negotiations as it makes it easier to create a consensus on the development of inflation.
Given this, an inflation rate below the target over a long period is a cause for concern, says Flodén. It increases the risk that confidence in the inflation target may decline and also has other implications that may worsen the conditions for wage formation. Quickly bringing inflation back to higher levels is therefore increasingly important.
"The very expansionary monetary policy the Riksbank is conducting now entails increased demand in the whole economy, which contributes to higher inflation and can also contribute more directly to anchoring inflation expectations around two per cent," concludes Mr Flodén.
Read the entire speech: Monetary policy and wage formation – a mutual dependence
