However, we may also have seen an extra wave in the exchange rate if market participants are basing their expectations on higher government spending of petroleum revenues than implied by the fiscal rule. Given the current level of the exchange rate, it would appear that foreign exchange market operators have been expecting a substantial increase in the use of petroleum revenues. Fiscal policy discipline will therefore be of importance to the krone exchange rate. Fiscal policy • The fiscal policy guideline: the central government budget deficit shall be equivalent over time to the expected real return on the Government Petroleum Fund. • The fiscal guideline has been adhered to • The fiscal guideline implies that petroleum revenues shall be phased in gradually  • The fiscal guideline is robust to fluctuations in government revenues  SG Gausdal 31.01.03  According to the guideline for fiscal policy, the central government budget deficit shall over time be equivalent to the expected real return on the Petroleum Fund. The fiscal rule is robust to fluctuations in government revenues and provides a stable framework for economic developments. The fiscal rule has been adhered to. In the budget for 2003, petroleum revenue spending was indeed somewhat higher than 4 per cent of the Petroleum Fund. This was because the estimated value of the Petroleum Fund at the end of 2002 was markedly reduced through the year as a result of the sharp decline in equity prices and the appreciation of the krone.
Per cent 4.0  88  3.5  92  3.0  96  Interest rate differential, (left-hand scale)  2.5 2.0  100  TWI (right-hand scale)  1.5  104 108  1.0 112 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 1) Trade-weighted effective exchange rate (TWI). A rising value denotes an appreciating rate Source: Norges Bank SG Gausdal 31.01.03  The main explanation for the wide interest rate differential is not that interest rates are high in Norway, but that interest rates are at a historic low abroad. For example, interest rates have not been at such a  low level in the US since the 1960s. Foreign interest rates have been reduced markedly to counter a downturn, while Norway has featured labour shortages, high income and consumption growth and a more normal interest rate. Low volatility in foreign exchange markets has probably amplified the effect of a wide interest rate differential. Furthermore, equity prices have shown a pronounced decline over close to 2½ years and investors have been seeking alternative investment vehicles. The appreciation of the krone in the first half of last year gradually changed the inflation outlook. In isolation, this implied a reduction in interest rates. However, the Norwegian economy was also exposed to high pay increases last spring, which had the opposite effect. In this situation, if monetary policy were to give priority to short-term inflation considerations, we could perhaps have reduced the interest rate last summer.