For a period of time – even perhaps a few years – wages can rise somewhat more without jeopardising the inflation target – for example, if the ratio of wages to national income is unusually low following a crisis and businesses are able to absorb some of the increase. This has been the case to an extent in the past few years. Other factors could counteract larger wage increases as well – for instance, declining foreign-currency prices of imports and a stronger króna have contributed to declining inflation even though wages have risen considerably more than the sum of the inflation target and the increase in productivity. But there are a number of indications that we will not be able to rely on these countervailing factors next year. By then, the slack will have disappeared from the economy, the ratio of wages to national income is at or above its historical average, and there are no premises for further appreciation of the króna, as the current account surplus is narrowing and the real exchange rate is no longer below its estimated equilibrium value. Nevertheless, different wage increases could be negotiated for different groups if there are grounds and will to do so. As I draw near the conclusion of my talk today, I would like to shift gears a bit and say a few words about credit ratings.
As regards timing, it is worth mentioning that it was not until very recently that inflation expectations have moved as close to target as they are now. As regards the latter question, most measures of the monetary stance have been well within normal range for quite a while, and there are few other signs that it has been too tight, expect perhaps in the past few months. For example, nominal growth in broad money measures about 6% after adjusting for factors that are largely unconnected to domestic economic activity, such as deposits of failed financial institutions in active ones. This growth is consistent with the situation that should exist when the economy is at equilibrium – when inflation is at target and output is at capacity. An examination of nominal GDP growth gives a similar result. Based on forecasts for 2014, it will average 5% in Iceland over the period 2011–2014, as compared with just under 4% in the US and the UK, about 2½% in Sweden – which is just above the inflation target alone– and about 1½% in the euro area, which is even below the inflation target for the region. This has been used to support the argument that monetary policy has been too tight in the euro area and Sweden, but as the figures show, this rationale does not apply to Iceland.