On the contrary, there are many indications that low inflation is a prerequisite for stable and high growth and for favourable employment developments. Therefore, low inflation is the best contribution that monetary policy can make to the fight against unemployment. It is only in the short term that high inflation may lead to lower unemployment. However to utilise such a trade-off has its risks, as the experiences from the 1970s and 1980s that I spoke about earlier indicated. The mere concern that policy will be too expansionary and that inflation may sprint ahead can push up a country’s interest rates and results not in higher but in weaker growth and employment developments. Therefore it is crucial for monetary policy that confidence in the low inflation regime be preserved. The very construction of the inflation objective implies that economic growth is taken into account in a certain way. A weaker growth, which creates excess capacity in the economy, normally means that inflationary pressures from the demand side will decrease. This in turn produces room for a more expansive monetary policy – interest rates will be lowered and demand will be stimulated. Conversely a very high demand signifies that production capacity risks hitting the ceiling. Prices and wages will then be pushed up. In order to prevent such occurrences, monetary policy must be tightened again and interest rates raised. The time horizon over which the Riksbank strives to achieve the inflation target also has an effect on growth and employment in the short term.
BIS Review 14/1998  - 11 -  Inflation Forecast December 1997 CPI and underlying inflation( UND1) 3,5  3,5  3,0  3,0  2,5  2,5  CP I  2,0  2,0  1,5  1,5  1,0  1,0  0,5  0,5  0,0 1995  0,0 1996  1997  1998  1999  3,5  3,5  3,0  3,0  2,5  UND 1  2,5  2,0  2,0  1,5  1,5  1,0  1,0  0,5  0,5  0,0 1995  0,0 1996  1997  1998  1999  Sources: Statisti cs Sweden and the Riksbank  BIS Review 14/1998