The effects of changes in the current account on net demand for the Norwegian krone can be illustrated by adjusting the basic balance for transfers and earnings to the Petroleum Fund and oil companies’ estimated cash surplus. Even though the current account surplus is increasing from 2003 to 2004 as a result of high oil prices, the adjusted basic balance is falling. In isolation, this is contributing to a decline in demand for the Norwegian krone. The decline is due to high import growth, which is reducing the current account surplus. In the Government’s budget proposal, the use of petroleum revenues remains virtually unchanged between 2004 and 2005. In spite of this, the krone exchange rate has appreciated recently. This reflects short-term capital inflows and may indicate that foreign exchange market operators expect that the use of petroleum revenues will increase in the years ahead. Themes in foreign exchange markets shift. In periods, investor focus on stock returns feeds through to exchange rate movements. During periods of political and economic unrest, investors may choose individual currencies as a safe haven - often the Swiss franc. In the autumn of 2002, the Norwegian krone was probably also perceived as a safe haven. In addition oil prices rose as a result of the uncertainty associated with the war in Iraq. Fluctuations between major currencies also affect the krone exchange rate. In recent weeks, investors have withdrawn from the US dollar and a number of currencies have appreciated.
Jarle Bergo: Oil prices, cyclical developments and monetary policy Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at Vest-Norsk Sparebanklag’s autumn conference, Bergen, 12 November 2004. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 3 November, Inflation Report 3/04 and on previous speeches. The references and the  Charts in pdf-format can also be found on the website of the Norges Bank. *  *  *  The objective of monetary policy is to safeguard the value of money in the long term. In the short and medium term, monetary policy can also contribute to stabilising production and employment. Historically, the experience of Norway and other countries is that high inflation has resulted in unstable output and employment. A fall in the price level will often occur in tandem with a downturn. The objective of low and stable inflation provides an anchor for economic agents’ expectations concerning future inflation. We have a very open economy with free capital movements. Stable inflation expectations also contribute to more stable krone exchange rate expectations. I will discuss this aspect in more detail later. Inflation targeting has proved to be particularly appropriate in very open, small and medium-sized economies such as the Norwegian economy.