Developments in the public sector were unexpectedly strong at the beginning of the year, which counteracted the fact that developments in the private sector were weaker than we had expected. The strained economic situation in the public sector indicates that employment there will develop weakly during 2004, while the economic upturn is still not expected to be reflected in any increase in the number of employees in the private sector. The fact that the labour market to some extent lags behind production development in the business sector is a normal part of the economic cycle, but developments in employment in the private sector have so far been slightly weaker than we had expected. Monetary policy can only marginally influence the weak labour market situation in the coming months. However, the situation in the labour market is a central factor in the assessment of demand and thus  2  BIS Review 7/2004  for long-term assessments of inflation. Labour market developments can influence future inflation in several different ways. If the demand for labour remains weak during a longer period and unemployment soars, there is a risk that this will have negative repercussions on household consumption and thus on demand. Households have become more pessimistic during the autumn, both with regard to unemployment and with regard to their private finances. So far we have seen no signs that household demand is about to slacken, but this was a factor we included in the risk assessment in the December Inflation Report.
The conclusion was that underlying inflation excluding energy, which was assessed as the best mirror of cyclically-related inflationary pressure, was expected to be in line with the target 1-2 years ahead, and this was why the repo rate was left unchanged. The information received so far since December does not appear to significantly alter the picture of a recovery in economic growth. However, there may be a risk that the weak labour market situation will last longer than anticipated and have repercussions for growth and inflation through weaker private consumption. Now that we are in the midst of compiling the data on which to base our decision at the February meeting, it looks as though the new information received since December gives scope for a further slight downward adjustment to the forecast of domestic cost pressure. This is because it seems that labour market growth will be somewhat weaker than expected, and thereby also the rate of wage increases, and the fact that productivity growth during the first three quarters appears to have been somewhat more favourable than we had anticipated. The risk of contagion effects via energy prices also appears to have declined. However, as we said, we are in the midst of our forecasting work and not all of the information is complete as yet. Our monetary policy meeting will be held on 5 February and this is when the final decision on the repo rate will be made. Thank you. 4  BIS Review 7/2004