Unemployment varied between 6 and 8 per cent around an average of 7 per cent during the ten years preceding the financial crisis.16 If the current rate of fall in unemployment continues, it will reach a normal level in the autumn of 2011. Although, the assessment in the Monetary Policy Report is that this will not take place so quickly, we should remember that both the Riksbank and others have underestimated the strengthening of the labour market in recent years (see Figure 20). Monetary policy must also take into account how the development of the economy affects wage formation. Monetary policy must resist the temptation to stimulate production and employment in the short term over and above the level that is compatible with a stable development of wages and inflation. A very rapid improvement of the labour market may lead to problems in the wage negotiations that will begin in the autumn. Wage formation has worked well in the last 15 years and this has helped to keep inflation at a low and stable level. It would be unfortunate if wage negotiations had to be conducted in a situation where there is overheating on the labour market. In the current situation, the shortage of labour is probably a better measure of how strained the labour market is than unemployment. The shortage of labour in the business sector was back to an almost normal level in the fourth quarter of 2010.
If instead we, members of the Executive Board, had followed the results of the simulations in the Riksbank’s model Ramses when the crisis hit, then the repo rate would have been reduced very slowly. Applied to the current situation in Sweden, the Taylor rule would give a repo rate of 3 to 4 per cent. This indicates that the repo-rate path should be even higher than it is. Repo rate changes Even though there are thus factors that with the current forecasts indicate that the repo rate should be increased more rapidly, I believe that there is a value in changing the repo rate at a steady pace in small steps. Unexpected, substantial changes may entail costs for households and companies and could cause instability on the financial markets. This was also my reasoning in 2006 and 2007 when the Riksbank was in a period of repo rate increases. I entered a reservation at every meeting in 2007 when the majority did not want to increase the repo rate by 0.25 percentage points. The most important thing for me therefore is that the repo rate continues to be raised in small steps meeting by meeting. My assessment at the latest monetary policy meeting was that it will need to be raised by 0.25 percentage points at every meeting this year so that it reaches 2.75 per cent at the end of the year. However, it is more difficult to assess the situation after the turn of the year.