MNI INTERVIEW: Swedish Wage Outlook Eases Rates Pressure- NIER

Swedish inflation should subside before the next major rounds of wage negotiations, helping to curb both second-round effects and the likely extent of rate hikes by the Riksbank, National Institute of Economic Research economist Jonas Kolsrud told MNI.

Wage increases for this year have already been negotiated, and the next wave will only be set for spring next year, Kolsrud said in an interview.

"You might expect that unions would push for higher wages in the coming negotiations but the forecast that we have is that inflation will abate … and the unions will appreciate that and restrain their wage demands,” he said.

The NIER, a government agency under the Ministry of Finance, issued fresh forecasts Wednesday showing hourly wage growth of 2.5% in 2022, 3.0% in 2023 and 3.3% in 2024. It predicted that the Riksbank would hike the policy rate in September but that it would hold at 1.0% in 2024 and 2025, with inflation peaking this year at 5.2% on the target measure and then dropping to 2.0%.

"In 2024, 2025 we will see positive real wage growth. Real wages will be negative now, of course, because of high inflation and slow wage growth in the coming two years,” Kolsrud said.

RIKSBANK MUST ACT

NIER sees unemployment stabilising at around 7%, relatively high compared to rates in some neighbouring countries, but roughly at the level of the Institute’s estimates of equilibrium, or non-inflationary, joblessness .

“At least two-thirds of the long-term unemployed belong to groups that find it difficult to get a job ... people who don't have secondary education,” Kolsrud said. “We now have a positive unemployment gap. Unemployment may soon be below the equilibrium rate.”

With little labour market slack and high headline inflation, the central bank will be forced to act, although relatively subdued pay growth ahead should dampen inflationary pressures.

"It is debatable whether they will hike the rate in June or will they wait until September," Kolsrud said, added that one option would be to start to unwind quantitative easing before hiking.

"We think that the Riksbank will need to respond to inflation picking up. The current inflation rate is unsustainable," he said.