Low short-term interest rates in the US, Japan and euro area countries have been inducing investors to shift into more long-term securities, with an attendant fall in long-term interest rates. Supply and demand factors may also have contributed to pushing down long-term rates. New regulations for European life insurance companies have also led to an increase in their share of investments in debt instruments with longer maturities. BIS Review 21/2005  1  Economic developments and prospects Norges Bank’s key rate, the sight deposit rate, is at a historically low level. Real interest rates are also low. Between December 2002 and March 2004, the key rate was reduced by a total of 5.25 percentage points. It takes time for an interest rate reduction to have an impact on inflation. We are now seeing the effects of previous monetary policy decisions, some of which were taken two years ago. The first signs of the effects of the interest rate cuts appeared in the foreign exchange market. The interest rate differential against other countries narrowed. It became more attractive to borrow and less profitable to invest in the Norwegian krone. The movement in the krone was reversed, and it depreciated through 2003 and into 2004. The nominal krone exchange rate, measured by the trade-weighted index (TWI), is now approximately back to the level prevailing in the mid-1990s. However, the impact on the krone exchange rate has been considerably dampened because external interest rates have remained low.
Hence, labour mobility can eliminate bottlenecks in the labour market. Employment is also strengthened by local wage negotiations. Some of the newer industries apply performance-related pay to a greater extent. This allows firms to reduce costs more easily while retaining employees when earnings decline. More traditional industries also seem to be making use of wage flexibility. Differences in productivity growth and wage growth across Norwegian manufacturing enterprises show that workers tend to accept lower pay increases in enterprises with low productivity growth.3 This can provide companies with more time to adapt and curb the impact on unemployment. Even though Norway fares favourably in relation to many other countries, the Norwegian labour market also has its weaknesses. Wage growth now probably accelerates at a higher level of unemployment than it would have ten or twenty years ago. Many unemployed are also channelled from unemployment to social security benefits, and benefits may be an obstacle to returning to the labour force. Sickness absence also rose for a long period, but has declined markedly over the past six months, partly reflecting tighter requirements concerning individual follow-up. The Petroleum Fund The Government Petroleum Fund was established in 1990 with a view to promoting an even distribution of wealth across generations. The idea behind the Petroleum Fund is to channel cash flows from petroleum production to the Fund, with the capital being invested abroad. Consequently, changes in oil prices have little effect on the mainland economy.