Today, low-inflation policies seem to enjoy high credibility in most countries, which is indicated in part by the fact that the rise in the oil price at least so far has had small effects on inflation expectations. The risk of an oil price rise spreading to wages and other prices in the economy is therefore also likely to be low. Furthermore, in the case of Sweden it should be added that inflation is rising from a low level and that agreements in the labour market have been settled for 2005 and 2006, further reducing the risk of contagion effects via the jobs market. To sum up: the fact that the increase in the oil price is partly a demand-driven phenomenon, that the dependency on oil has decreased and that inflation-targeting regimes enjoy high credibility suggests that the higher oil price should mainly be reflected in a temporary, limited rise in inflation and that the effects on the real economy should be fairly small. If this is correct, the general economic and inflationary developments are more significant for monetary policy than developments in the oil price. This brings me to a discussion of the broad outlook for the Swedish economy in the years ahead. Economic activity in Sweden Despite the Riksbank’s relatively optimistic outlook for the Swedish economy compared with other forecasters, we have gradually revised up our forecasts in the past year.
If the inflation target were lower, a relative increase for some might necessitate lower nominal wages for others. So, two per cent inflation serves as an anchor for the economy. The inflation target should be the basis for wage negotiations, rent agreements, tax increases, etc. Thus, it is necessary that the target is credible, that people trust that it will be met. Before, the idea instead was that the fixed exchange rate would imply an inflation target in line with the inflation rates of our competitor countries. But this approach never worked in the same way as the inflation target. Does monetary policy affect economic growth? It is fairly obvious that when inflation is around 10 per cent the economy becomes unhealthy. Economic agents seek to profit from the inflation. Much depends on how the tax system is designed. In Sweden, it encouraged borrowing and speculation in real property and shares. Investment  1  Strictly speaking it should be the price developments for output, i.e. the GDP deflator, but since the GDP deflator can be estimated to increase by around 2 per cent a year if consumer prices rise in line with the inflation target (2 per cent), this approximation works. 2  BIS Review 84/2005  decisions take on a different focus than when macroeconomic conditions are stable. In Sweden, we saw a property boom in the 1980s and an overheated economy that had to be dampened.