Our projections are based on the assumption that fiscal policy will provide some stimulus to aggregate demand and output in 2008 and 2009, but somewhat less than a mechanical application of the fiscal rule based on our oil price assumption would imply. 4  BIS Review 22/2006  Norges Bank operates a flexible inflation targeting regime and seeks to achieve an interest rate path that provides a reasonable balance between the objective of bringing inflation up towards 2.5 per cent over time and stabilising developments in output and employment. Norge Bank’s projections in the baseline scenario is based on an interest rate path that we find strikes a reasonable balance between the two objectives. In the baseline scenario, interest rates in Norway and abroad are assumed to rise somewhat faster in the longer term than current forward rates may imply. Exchange rate movements are difficult to project. The interest rate path at home and abroad may be consistent with an approximately unchanged krone exchange rate. The high growth rate in the economy implies a gradual pick-up in price and cost inflation. With interest rate developments as outlined above, CPI-ATE inflation is projected to increase from about 1¼ per cent today to about 2 per cent at the end of 2007. There are prospects of a further increase in inflation, with inflation projected to be close to the target of 2.5 per cent three years ahead. According to our estimates, capacity utilisation is now slightly higher than its normal level.
Spain has a significant productivity gap with the euro area and recent research has related this gap to an inefficient reallocation of resources towards less productive firms during the expansionary period. However, since 2008 there has been an improvement in the reallocation of resources, especially due to the disappearance of many unproductive firms. But business mark-ups stand at relatively high and rising levels. This could indicate a persistent lack of competition in some markets, with adverse implications in terms of competitiveness, for instance, those regulations that distort the cost of production among firms or affect incentives to grow, such as market barriers due to the heterogeneity of regulations across regions. More generally, the Spanish economy continues to exhibit a low productivity level in terms of the average firm, something that can be perhaps explained through different combinations of inadequate managerial skills and educational attainment of workers, as well as a relatively low a degree of technological capitalisation. Hence, it is important to pass reforms aiming at reducing the rate of early school dropouts and to foster the relationship between firms and both the vocational training and university systems. These, together with a new well-designed and effective system of incentives to suppport innovation  6/9  in the private sector are prerequisites for enhancing the Spanish economy’s stock of technological capital and its capacity to innovate. So far, I have addressed a number of issues mostly from a national point of view. But, indeed, solving Spain’s problems cannot be done in isolation from the euro area.