When this is carefully done the Riksbank – say some of the critics – can use the expected higher inflation (that we ourselves have created) as an argument for making the interest rate increases we have wanted to make all along. This type of criticism was common last autumn, for example, when the BIS Review 14/1998  -8-  Riksbank spoke in various connections about its inflation outlook and explained that interest rate increases might be necessary. I have the following answer to these criticisms. To begin with, the Riksbank’s focus on inflation developments is entirely natural. It is undoubtedly our task to show clearly the reasons for our decisions. Without a candid accounting of monetary policy from the Riksbank’s perspective it would be more difficult for the political decision-makers and the general public to evaluate monetary policy and our fulfilment of our objective. Think what type of debate we would have and how monetary policy would be seen if the Riksbank only made its decisions without commenting at all on the outlook for inflation and without giving reasons for its policies. Thus the need for the Riksbank to speak about inflation is obvious. Naturally it cannot be ruled out that in doing so it will influence households and businesses in their views on price developments, however our influence should not be exaggerated. The cause-and-effect relationship is rather the reverse: the Riksbank reacts to inflationary developments, which in turn are determined by a great number of decisions by businesses and households.
One possible explanation is that, in an economy based heavily on the production of services, firms have been putting their teams to work on marketing and sales to drum up business against a backdrop of weak overall demand. Those teams may well be working hard. In that case, it may not feel to managers, when filling in surveys, as if they have lots of spare capacity, But, as I have described it, those staff would be working on inputs rather than outputs – making productivity across the economy as a whole look weak. Nor does labour hoarding square obviously with relatively healthy growth in private sector employment over 2010 and the first half of 2011, before the recent slowing. In our internal debates, I have posited that this could be a symptom of the economy’s necessary rebalancing. Firms facing expanding markets and demand may be hiring. Whereas, against a backdrop of a very low policy rate and some forbearance by banks, individual firms in contracting sectors could be holding out, either not recognising that their market is contracting or believing and hoping that it will be their competitors rather than themselves that end up cutting capacity or closing. It can be argued against that that rising employment, and weakness in productivity, is spread fairly evenly across the private sector. But I suspect that we have to dive down into the data to get a more disaggregated picture than we, as macroeconomic policymakers, usually need.