Central bank says it created economic slack to protect wage agreements

The central bank created economic slack in part to reduce the risk that collective wage agreements would be terminated, Deputy Governor for Monetary Policy Þórarinn G. Pétursson said in an interview on mbl.is’s Spursmál programme.

Earlier this year, the bank saw a risk that inflation would not fall quickly enough to prevent the agreements from being put at risk. Pétursson said the bank believed it could shape the economic conditions in which a decision on whether to continue the agreements would be made.

“We can create economic conditions in which there is no interest in terminating them — in other words, create enough slack in the economy for unemployment to become high enough that there is no interest in ending these agreements,” he said.

Asked whether that meant the central bank had created unemployment for this purpose, Pétursson referred to the economic slack the bank had helped bring about. He said this was done, among other reasons, to try to ensure the agreements were not terminated.

Pétursson welcomed the decision to keep the agreements in place and said the leaders of the unions in the so-called broad coalition deserved credit for their assessment. He added that their decision was shaped by economic conditions the central bank had helped create.

The bank’s next task is to bring inflation and inflation expectations down in line with its forecasts. Pétursson said the current interest-rate level was sufficient to achieve that, but the bank was prepared to take further steps if conditions changed.