Higher resource utilisation in the Norwegian economy will lead to somewhat higher wage growth and will also make it possible for enterprises to increase their operating margins. However, inflation will still be restrained by low external price impulses. The positive contributions from the exchange rate depreciation in 2003 will unwind in the course of spring 2005. The contribution from the exchange rate to inflation will then gradually become slightly negative. There are prospects that inflation will reach the inflation target towards the end of the projection period. There is uncertainty surrounding the projections. The projections are partly based on our analysis of relationships in the economy, the exchange rate assumption and the forward interest rate assumption. We can give some indication of the uncertainty surrounding the projections on the basis of historical deviations between projected and actual price developments. Based on these calculations, inflation at end-2007 is projected with a probability of 50 per cent to be between 1.75 and 3.25 per cent. Consumer prices may show erratic variations from one month to the next. These fluctuations may be due to temporary conditions. At other times, they may reflect more lasting changes. When the figures deviate from our projections, more observations are therefore needed before an assessment can be made of whether inflation is in line with the projections. The projections in the Inflation Report are based on the assumption that the interest rate moves in line with financial market expectations.
There are still expectations of an increase in international interest rates, but market participants have lowered their growth and interest rate expectations as a result of high oil prices. Growth in the Norwegian economy picked up during the second half of 2003. The low interest rate has contributed to strong growth in private consumption and housing investment. Activity has picked up in service industries and the construction sector. High petroleum investment, the global economic recovery and a weaker krone through 2003 have improved conditions for manufacturing. Profitability is improving for mainland enterprises. There are signs of renewed growth in investment in a number of industries. Imports have expanded markedly. Potential growth in the Norwegian economy is estimated to increase somewhat more than normal this year as a result of increased competition and rationalisation in many sectors. This will contribute to fairly high growth in the Norwegian economy without the emergence of constraints on the supply of labour or productive capital. The high rate of growth in output nevertheless implies that the output gap will approach zero towards the end of 2004. The output gap is a measure of the difference between the actual level of output and potential output. Developments in the output gap provide a basis for assessing cyclical developments and can thus shed light on domestic price and cost pressures in the economy. It is difficult to know how high capacity utilisation is at any given time.