If the Riksbank judges that inflation will rise above the 2 per cent target, it is up to us to raise interest rates. Consequently, excessively high wage increases will not lead, except possibly in the very short run, to higher inflation. Instead they will result in weaker economic activity and lower employment in the years ahead. In the earlier situation with a fixed exchange rate, excessively high wage increases primarily affected manufacturing and other parts of the economy that are exposed to international competition. Today the effects will be felt in particular by sectors that are sensitive to interest rates, such as distributive trades and a debt-burdened public sector. BIS Review 96/1997  -54. Conclusions for monetary policy The overall assessment in the inflation report is that the monetary stance is well balanced. Today there is no reason to modify that conclusion. In the past month there has been no appreciable change in the outlook for inflation. After the interest rate increases in Germany and other countries almost a week ago, many people have asked how this affects the Riksbank’s actions. As stated already on several occasions, the answer is: not much as long as the conditions for inflation have not changed. The Riksbank targets inflation and it is this target that guides policy. In view of what has happened in the past month, there is reason, finally, to highlight a couple of points in the report. The first is that monetary policy is being conducted against the background of an economic upswing.
In 1999 the GDP growth rate is expected to be rather more than 3 per cent. This implies that in 1998 and 1999 growth will be stronger than the increase in potential output, for which the annual trend is estimated to be just over 2 per cent. That means that today’s surplus capacity will be activated by degrees. It is difficult to tell how quickly this will happen. The Riksbank considers that the output gap -- a way of attempting to gauge unutilised capacity in the economy as a whole -- is currently about 2 per cent of GDP. With the growth rates envisaged above, the gap would then close some time in 1999. Other information with a bearing on when inflation might be likely to accelerate was also included in the inflation report. Estimates of structural unemployment and thereby, indirectly, of the level of unemployment that can be combined with stable, low inflation, suggest that risks of inflation also exist less than two years ahead. The rate at which capacity utilisation rises may likewise play a part. A rapid reduction of unutilised resources might generate inflationary impulses even though there is still a capacity surplus at total level. Risks in the wage negotiations Wage formation is particularly relevant at present because the settlements that are due in the coming six months will cover a large part of the labour market. Labour shortages are not yet being reported from more than a few sectors, but experience shows that the domino effects can be substantial.