If oil prices develop through the rest of 2004 in line with current forward prices, and the other assumptions in the Revised National Budget for 2004 for calculating allocations to the Petroleum Fund for 2004 prove to be correct, purchases of foreign currency for the Petroleum Fund may be resumed this year. This will then be in addition to the regular transfers of profit from the State’s Direct Financial Interest in petroleum activities (SDFI) to the Petroleum Fund, which are invested abroad. Higher oil prices mean higher revenues for the oil companies. International and Norwegian oil companies with activities in Norway increase their capital outflow when profits increase. Thus, in the short and medium term, cumulative profits in the petroleum sector generate little added capital in the domestic economy. If petroleum revenues are disregarded, Norway has a current account deficit. The deficit has been increasing in recent months, and this may also, in isolation, boost demand for foreign exchange in the Norwegian foreign exchange market. The krone appreciation has probably been affected by shifts in themes in the international foreign exchange markets, due in part to an upward adjustment of interest rate expectations in the US in April. In addition, financial market expectations of higher interest rate increases in Norway in 2005 and 2006 relative to other countries have probably contributed. A self-reinforcing mechanism may have been functioning for a short period after the krone began to rise in value at the beginning of March this year.
The real krone exchange rate as measured in terms of developments in relative prices is an expression of the Norwegian krone’s purchasing power. When the curves in the chart are above zero, the exchange rate is stronger and competitiveness weaker than the average level since 1970. The real exchange rate has fluctuated considerably over time and has deviated substantially from the average level over longer periods. Nevertheless, there has been a tendency for the real exchange rate to revert to this level. In the chart, the point for 2004 shows the real exchange rate with wage and inflation projections for 2004 from Inflation Report 1/2004. In relative prices, the real exchange rate is now about 2 per cent weaker than the average since 1970, whereas it is almost 4 per cent stronger than its historical average measured in terms of relative labour costs. Economic developments Interest rate expectations have been revised upwards in a number of countries. Growth has picked up in the US. As in the second half of 2003, growth is primarily being driven by private consumption and business investment. Following a surprisingly long period of weak labour market developments, employment has begun to edge up and is now higher than at the same time last year. In recent months, inflation has increased from a very low level. As a result, interest rate expectations have been revised upwards, and the key rate in the US is expected to be raised at the end of June.