This could in turn result in lower demand and lower commodity prices. High oil prices have mixed effects on the Norwegian economy. Lower demand abroad will have a negative impact on parts of the Norwegian economy. At the same time, domestic demand is normally stimulated by higher petroleum investment. The balance in the Norwegian foreign exchange market will not be affected to any appreciable extent. So far, the effects of high oil prices on developments in the real economy have been relatively limited. Credit developments in the past year have given ambiguous signals to our interest-rate setting. Growth in household debt is high. Enterprises have been reducing their debt for some time, but developments over the past months may suggest that this trend has been reversed. Norwegian enterprises and households borrow primarily at variable rates. Loans with no form of fixed rate agreement account for over 80 per cent of the value of loans to the household and enterprise sector. The current interest rate level is very low. Long-term investments cannot be made based on the assumption that this interest rate level will persist. According to money market expectations, the interest rate will eventually stabilise at close to 5½ per cent. This interest rate, plus a premium for banks’ margins, provides a more realistic indication of the interest rate level that will apply over the loan’s life than the variable interest rates prevailing today. Growth in the Norwegian economy is now solid. It appears that growth will also be high in 2005.
Commodity exports play a key role in several of the countries that were the first to introduce inflation targeting and, and as an oil exporter, we have learned from their experience. The first inflation target was introduced in New Zealand in 1990. Canada followed in 1991, the UK in 1992, and Sweden and Australia in 1993. A number of other countries have followed suit. In Norway, the Government issued a regulation introducing an inflation target in 2001. Monetary policy in euro area countries and Switzerland is also aimed at price stability, even though this is not referred to as inflation targeting in these countries. Inflation targeting means setting the interest rate so as to achieve a numerical target for inflation. Norges Bank sets the interest rate with a view to stabilising inflation at 2.5 per cent within a reasonable time horizon, normally 1-3 years. The more precise horizon will depend on disturbances to which the economy is exposed, and how they affect the path for inflation and output. The inflation target represents a framework for, not an obstacle to, monetary policy’s contribution to stabilising output and employment. We have a flexible inflation targeting regime, i.e. both variability in inflation in relation to the target and variability in output and employment in relation to trend are given weight. The objective of monetary policy is low and stable inflation. The instrument is the interest rate. The interest rate influences inflation with a lag and with varying intensity.