Central bankers in Sweden dream of pay rises as time runs out
By Bloomberg
As the Riksbank endeavors to restore faith in its inflation target before wage talks start, it is resorting to verbal interventions to drive up labor costs in an effort to support Swedish prices.
According to Robert Bergqvist, chief economist at SEB AB and a former researcher at the Riksbank, policy makers have little choice but to target the labor market.
“If the Riksbank still hasn’t managed to raise wage expectations when we move into the fourth quarter, that could almost mean game-over for its inflation target,” Bergqvist said in a phone interview. “It’s very critical for the Riksbank to be aggressive right now, I can understand that it wants to intervene in the wage negotiations.”
Sweden sank into a deflationary pit last year after the Riksbank was slow to focus on developments in consumer prices, arguing until recently that an overheated property market meant stimulus measures should be handled with caution. But the bank’s latest efforts to reverse that stance and throw unprecedented support measures at the economy have so far done little to revive price growth.
Negative Rates
Even after cutting the benchmark repo rate to minus 0.35 percent and delving into a quantitative easing program, prices have failed to pick up. The country’s June inflation report showed consumer prices fell 0.4 percent from a year earlier.
At the latest Riksbank board meeting on July 1, Deputy Governor Per Jansson warned “there is now a risk of the inflation target not forming the basis of next year’s wage negotiations.” He said “this would of course be deeply regrettable,” according to the minutes released July 15.
The bank is now looking at all the levers in the economy that might help resuscitate price growth. Jansson has sought to dispel suggestions that Swedish wage growth has been faster than in its main trade partners.
“Contrary to what is often suggested in the debate, unit labor costs in Sweden have increased much more slowly than in, for example, the United States and Germany during this period of low inflation,” he said.
The Riksbank in July estimated that wages would rise more than 3 percent in both 2016 and 2017. But a June survey by TNS Sifo Prospera of labor market parties, purchasing managers and money market participants showed wages are only seen growing 2 percent next year -- down from 2.1 percent in the previous survey -- and 2.2 percent the following year.
Pay Intervention
Many employers groups have balked at the suggestion that they should base wage talks on the Riksbank’s price goals. In a June opinion piece in Dagens Industri, Sweden’s main business newspaper, six employers’ groups said doing so would be wrong. Five unions responded that they would take the Riksbank’s policy into account.
The Riksbank’s message risks colliding with Sweden’s tradition of leaving wage negotiations to labor market parties - - policy makers have traditionally not intervened. Its approach may set a precedent for future wage setting, Bergqvist at SEB said.
“Today we are in a situation where the Riksbank, even if it’s treading very carefully, is trying to affect wage negotiations,” he said. “In a sophisticated way it tries to show that we need to get wage increases. This could threaten the so-called Swedish model of collective bargaining, and could have consequences for the stability and success of the Swedish economy.”