This line of reasoning applies when demand grows rapidly, as now, and when capacity utilisation rises. In my opinion, the interest rate effects would be different if the growth in demand slowed down, the labour market weakened and capacity utilisation ceased rising. Then there would be less upward pressure on house prices and I believe that an interest rate cut would be less risky in these terms. International developments could also be so weak that insufficient export market demand would curb the recovery. The weak developments in our most important trading partner countries, the euro area, are particularly worrying. Like Sweden and the United States, Germany, France and Italy are affected by globalisation, but in these countries the labour market seems to be finding it particularly difficult to cope with change. Germany is at the same time undergoing extensive structural reforms, such as the reduction of compensation levels for unemployment benefits and other transfers, and also longer working hours without full compensation. In the long term, these measures are aimed at increasing the labour supply and competitiveness of the German economy. However, in the short term they lead to uncertainty for many individuals and thereby curb consumer confidence and demand. At the same time, fiscal policy is tied by weak government finances due to a lack of fiscal consolidation during the good times at the end of the 1990s which has made the obligations under the Stability Pact more or less binding, while monetary policy is common to the entire euro area.
Villy Bergström: Is the present low inflation rate a problem? Speech by Mr Villy Bergström, Deputy Governor of Sveriges Riksbank, at the annual meeting of the Swedish Association of Independent Savings Bank, Vadstena, 30 May 2005. *  *  *  As one of my colleagues said recently, it appears as though we are now undergoing the gloomiest economic boom of our time. It is in many ways an unusual economic situation; growth is healthy, productivity is very strong, export demand is stable, wage trends look good, households are borrowing away and house prices are developing well. However, employment is weak and inflation is low. The annual CPI inflation rate was 0.3 per cent in April and the UND1X rate was 0.4 per cent. This is below the interval of 2 per cent +/- one percentage point we have as our inflation target. Of course, this is a failure, albeit one that is largely beyond our control. Our efforts, analyses and assessments are all aimed at keeping inflation as close to the target level as possible and within the interval we have specified ourselves. The question is what conclusions we should rightfully draw from this miscalculation, particularly with regard to employment. Monetary policy’s effect one to two years ahead – a challenge for communication To begin with the low inflation rate makes greater demands on the Riksbank’s ability to explain its policy.