The interest rate reductions since 2002 have contributed to a turnaround and the economy has experienced a soft landing following the years of high cost inflation in Norway and the period of weak activity in the world economy. Lower interest rates in particular have contributed to sustaining growth in disposable income and private consumption. Household demand is one of the most important driving forces in the Norwegian economy. Low interest rates, high growth in real income and improved job security are now creating a basis for strong growth in household consumption. BIS Review 61/2004  3  High wage growth over several years from 1998 has eroded the competitiveness of the Norwegian business sector. The nominal krone exchange rate measured by the trade-weighted index is now approximately at the level prevailing in the mid-1990s, while labour costs in manufacturing have risen considerably more than among our trading partners in the same period. The business sector is still burdened with the loss in competitiveness that is due to high wage increases. The exposed sector has been scaled back. Companies that are still in operation may be in a better position to cope with the high wage level. A more efficient service sector may also have strengthened the export industry. Nevertheless, costs may hamper activity and employment growth. The cost level with the current krone exchange rate is close to 15 per cent higher than in the mid-1990s and about 4 per cent higher than the average for the past 30-35 years.
At present - with continued low interest rates abroad and a close link between domestic interest rates and the krone - a tighter monetary policy would restrain credit demand primarily because job security would be reduced as a result of a stronger krone. House prices and developments in household credit influence consumption and housing investment. We seek to take account of these indirect effects in interest-rate setting. A turnaround has occurred in the Norwegian economy. The economy has experienced a soft landing after the long period of high cost inflation in Norway and sluggish external activity. •  Output has returned to trend and is now showing a marked rise. •  Employment has returned to trend and is rising. •  Unemployment is at the 1996-level and is equal to the average for the 1990s. •  Wage growth is broadly in line with a level that is consistent with the inflation target given normal productivity growth. •  Overall credit growth is balanced. Credit is expanding approximately in line with trend growth in nominal GDP. •  Labour costs in Norway relative to our trading partners are now broadly in line with a long-term average. •  The nominal krone exchange rate is on a par with the average for the 1990s. •  The interest rate level is close to the level prevailing among our trading partners. •  Inflation expectations are approximately the same as the target.