Norges Bank sets the interest rate so that future inflation will be equal to the inflation target of 2½ per cent. High demand for goods and services and labour shortages normally point to higher inflation in the future. 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. The inflation target is a vehicle for, not an obstacle to, monetary policy’s contribution to stabilising output and employment. This intention is also expressed in the Regulation on Monetary Policy. The inflation target of 2½ per cent is broadly in line with the inflation targets of our trading partners. It is also an anchor for developments in the krone exchange rate. The krone fluctuates. We have open trade with other countries and free capital movements. We do not have the instruments to fine-tune the krone exchange rate. As long as inflation remains low and stable, any substantial deviations in the krone exchange rate over time will have a considerable impact on activity in business and industry. As a result, the krone exchange rate will tend to return towards its long-term mean following any substantial deviations. The best contribution monetary policy can make to stability in the krone exchange rate is to aim at low and stable inflation. Wide cyclical differences and differences in wage formation between Norway and other countries have always had an impact on the krone exchange rate and competitiveness.
We know that employment in some service industries has fallen. This may indicate that many service enterprises have adjusted their workforces. To some extent, higher costs can more easily be passed on to customers through higher prices in this sector. This picture is typical of the final phase of an expansion. A tight labour market and the contest for economic resources lead to a sharp increase in real wages. This results in high growth in household income, consumption and housing investment. The propensity to borrow increases and house prices rise sharply. On the other hand, the business sector faces pressures on profitability, a high cost level and declining investment. Commercial property prices fall. At the same time, corporate restructuring brings growth in employment to a halt. When costs reach a high level, employment starts to fall. The period of expansion has then come to an end. The cost level must be adjusted to restore balance in the labour market. Wage formation in Norway is subject to an institutional and statutory framework and agreements that have been developed over several decades. The result of negotiations is influenced by labour legislation, including regulations relating to job protection, unemployment benefits and the rules that apply to cooperation and settlement of industrial disputes. In important segments of the labour market, there appears to have been a shift in the social partners’ strategic position in negotiations in favour of employees.