Flexible inflation targeting builds a bridge between the long-term objective of monetary policy, which is to keep inflation on target and provide an anchor for inflation expectations, and the more short-term objective of stability in the real economy. Low inflation in recent years is both the result of monetary policy assessments and unforeseen disturbances to the economy. Towards the end of 2002, Norges Bank shifted its monetary stance in an accommodative direction as new information indicated that developments in output and unemployment might be weaker than projected and inflation might be lower than target. The key rate was reduced markedly in 2003 and 2004. The low interest rate level has contributed to a considerable increase in demand for goods and services. Increased petroleum investment and favourable prices in markets for our export products have also made a contribution. So far in this cyclical upturn the mainland economy has expanded by an average of close to 4 per cent. Wage developments reflect and influence the business cycle. Strong employment growth in the 1990s resulted in a rise in labour costs, which in turn had a dampening impact on growth. Moderate wage growth in recent years has been accompanied by a strong cyclical upturn. It appears that wage growth will be somewhat higher in 2006 than in 2005, but not higher than expected. Employment growth was lower over a long period compared with the cyclical upturns in the 1980s and 1990s.
Reports from the regional network indicate that capacity utilisation is high in the construction industry and in manufacturing, particularly among suppliers to the petroleum industry. There were reports of shortages of engineers and project managers. Many of our contact enterprises in corporate services also reported increasing skills shortages. On the other hand, idle capacity is reported in retail trade and in household services. There are limitations to how much the supply of Norwegian labour can increase ahead. Labour participation rates are at a historically high level, particularly when taking into account demographic developments. Developments in the labour market are similar to the profile observed ahead of the period of accelerating wage and cost inflation that started in 1998. Several factors can explain why wage growth has been moderate so far during this cyclical utpurn. An increase in inward labour migration and the opportunities provided by an international labour market may have resulted in greater emphasis on the high wage level in Norway relative to our trading partners. Inward labour migration has also contributed to reducing bottlenecks in some industries. Developments in region North are fairly similar to the situation in the other regions of the country. Region North reported prospects of solid growth in most industries. Manufacturing, retail trade and the local government and hospital sectors expected moderate growth in investment. The service sector expected zero growth in investment. There were reports of moderate employment growth in all sectors, with the exception of the local government and hospital sectors where growth was unchanged.