Lower demand in turn curbs the rise in prices and wages. Higher interest rates make it more attractive to invest in NOK and borrow in foreign currency. Therefore, higher interest rates normally lead to an appreciation of the krone. This makes imported goods cheaper. In addition, a strong krone reduces activity, profitability and the ability to pay in the internationally exposed sector. Expectations in the US as to how far the interest rate will fall have been adjusted downwards considerably since summer 2002. Last summer, market participants expected the key rate in the US to be increased to about 5 per cent towards the end of 2004. Now interest rates are believed to have reached their lowest level and are expected to remain at 1 per cent until the end of 2003, with a gradual rise to about 2.5 per cent in 2005. Clearer signs of the expected upswing have emerged recently, however. GDP grew by 3.1 per cent (seasonally adjusted, annual rate) in the second quarter. Optimism among participants in the financial markets is increasing; both equity prices and long-term interest rates have risen. Despite improvement in the US economy, some aspects still give rise to uncertainty as to whether the expected upswing will be sustained. Capacity utilisation in manufacturing is still low. The household saving ratio is low and household debt is high. The current account is showing a large deficit.
Svein Gjedrem: Monetary policy and the economic situation Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Norwegian University of Science and Technology, Trondheim, 2 September 2003. The text below may differ slightly from the actual presentation. The speech is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 13 August and on previous speeches. The Charts in pdf can be found on the Norges Bank’s website. *  *  *  The operational target of monetary policy as defined by the Government is inflation of close to 2.5 per cent over time. The inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. The inflation target is a vehicle for monetary policy’s contribution to stabilising output and employment. This intention is also expressed in the Regulation on Monetary Policy. High demand for goods and services and labour shortages normally point to higher inflation. 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. Norges Bank sets the interest rate so that future inflation will be equal to the inflation target of 2½ per cent. The interest rate has been reduced since December last year in response to the change in the inflation outlook.