The inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. Households, businesses, public entities, employees and employers can base decisions on the assumption that inflation in Norway will be 2½ per cent over time. High demand for goods and services and labour shortages normally point to higher inflation in the future. When interest rates are increased, demand falls and inflation is kept at bay. When demand is low and unemployment rises, inflation will tend to slow. Interest rates will then be reduced. The inflation target is a vehicle for, not an obstacle to, monetary policy’s contribution to stabilising output and employment. This intention is also expressed in the Regulation on Monetary Policy. The inflation target of 2½ per cent is broadly in line with the inflation targets of our trading partners. It is also an anchor for developments in the krone exchange rate. The krone fluctuates. We have open trade with other countries and free capital movements. We do not have the instruments to fine-tune the krone exchange rate. The krone has been strong. As a result, prices for imported goods have fallen. This has led to low and stable inflation in spite of sharp wage growth. The krone exchange rate fluctuates. This is not surprising because other countries’ currencies also fluctuate. The Swedish krona, sterling and the New Zealand dollar have fluctuated considerably in periods. The krone exchange rate is the price of our currency measured in terms of a foreign currency.
On the whole, a moderate, temporary decline in household saving is expected in 2003. Next year, a normalisation of electricity prices will contribute to increasing real income growth compared with 2003. At the same time, we have assumed that a share of the increased use of petroleum revenues over the central government budget will entail increased transfers or tax cuts for households. These factors, combined with lower interest rates, may fuel relatively brisk growth in private consumption in the next few years. In the last few months, house prices have risen at a slower pace than in previous years. Activity in the housing market has declined and it takes longer to sell a dwelling. Growth in household borrowing remains high, but has eased somewhat recently. Weaker developments in house prices and reduced household optimism may further restrain credit growth in the future. Growth in mainland GDP is projected to be lower than trend growth, at 1¼% in 2003 and 2% in 2004. In 2005, growth is projected at 2¼%. The underlying rise in prices in the coming year will be marked by the appreciation of the krone over the last two years. Despite high wage growth, the year-on-year rise in consumer prices adjusted for tax changes and excluding energy products (CPI-ATE) will most likely range between 1½ and 2% until the summer. Subsequent developments will partly depend on externally generated inflationary impulses, changes in the exchange rate and how these changes feed through to consumer prices in Norway.