The appreciation of the krone and high wage growth led to a considerable deterioration in the competitiveness of Norwegian enterprises - and made imported consumer goods cheaper. Norges Bank has no set target for the level of the exchange rate. Developments in the krone exchange rate are nevertheless important in interest rate setting. The response to a change in the exchange rate will depend on its expected impact on inflation. This requires an evaluation of the reasons for and the duration of the change. Short-term fluctuations in the krone exchange rate tend to have very limited effects on economic developments, while long-lasting changes can have an impact. High wage growth over several years has eroded the competitiveness of the Norwegian business sector. Last year, the effects of high wage growth on export industries were amplified by the changes in the krone exchange rate. The krone has now reverted to around the level prevailing in the mid-1990s, while labour costs in manufacturing have increased by almost 15 per cent more than among our trading partners in the same period. The appreciation of the krone proved to be reversible, but the loss of competitiveness and jobs caused by relatively high domestic wage growth is difficult to recoup. A precondition for a considerable improvement in competitiveness is that real wage growth is lower than productivity growth in the business sector for a period. Experience shows that this only occurs in periods with low resource utilisation.
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 only a gradual rise thereafter. Interest rates were also expected to increase markedly in  2  BIS Review 50/2003  Europe in summer 2002. Instead, interest rates were also reduced here and expectations were revised downwards substantially. The lower projections for growth reflect the effect on the world economy of a number of negative shocks, such as the war in Iraq and the SARS outbreak. It may have taken longer than first expected to correct imbalances generated by overoptimism in sectors such as the IT industry. High oil prices may also have contributed to restraining growth. The combination of low international interest rates and weak cyclical developments contributed to high interest rate differentials against the krone and the strong exchange rate. Activity in the global economy has picked up from the low level prevailing last winter, primarily reflecting high growth in the US and some Asian economies, including Japan. Recent statistics show that the annual rate of GDP growth in the US was 7.2 per cent in the third quarter of 2003. Strong growth in private consumption and a rise in business investment are evidence of a gradual and broadbased upturn. Employment figures are also showing a positive trend and unemployment is falling.