Per cent 12  12  9  9 China  6  Central Europe  6 3  3  0  0 1991  1993  1995  1997  1999  2001  2003  Sources: Statistics Norway and Norges Bank  A steadily larger share of Norway’s consumer goods imports come from China and Central European countries. Growth in imports from China was provided with an additional impetus after China became a member of the World Trade Organization in 2001. Imports from Eastern Europe have also continued to grow. There are many economic agents in Norway that are benefiting from globalisation. Consumers are enjoying lower prices for goods and services. Input prices have fallen and companies can sell their products in new markets. But there are also costs. Norwegian businesses and jobs may lose in the competition. The challenge lies in moving idle resources to new business activities. This requires adaptability and a sound cost policy. Monetary policy The operational target of monetary policy, as defined by the Government, is inflation of 2½ per cent over time. The target is symmetrical - it is just as important to avoid an inflation rate that is too low as an inflation rate that is too high. The inflation target provides economic agents with an anchor for inflation expectations. BIS Review 11/2004  5  Chart 7. Consumer prices and mainland GDP Percentage growth.
Constant 2000 prices 1200  1200  1000  1000 Trend Actual  800  800  600  600 1980  1984  1988  1992  1996  2000 2003  Sources: Statistics Norway and Norges Bank  Monetary policy credibility Expectations play an important role in price and wage formation. Expectations concerning inflation and economic stability are of crucial importance for the foreign exchange market. Inflation expectations also influence wage demands and pricing in the business sector. With confidence in monetary policy, expected inflation in the long term will be close to the inflation target. This alone contributes to stabilising inflation. Surveys indicate that enterprises, the social partners and other economic agents expect inflation to be 2½ per cent over time. Financial market participants also expect that inflation will be 2½ per cent ahead, as implied by long-term bond yields. A flexible exchange rate The krone exchange rate is an important channel for monetary policy. The krone fluctuates. This is not surprising because other countries’ currencies also fluctuate. The krone exchange rate is the price of our currency measured in a foreign currency. Developments in other countries are just as important for the krone as developments in the Norwegian economy. Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest rates as well as output and employment. A structural feature of open economies like the Norwegian economy - with a national currency - is that the exchange rate fluctuates.