The interest rate reductions and the fall in the krone exchange rate imply that inflation will gradually increase and will be considerably higher than the current level as early as next spring. After such a period of very low inflation as we have now witnessed, it is appropriate to be particularly vigilant in monetary policy in the event that inflation does not increase as projected. 2  These estimates are uncertain and must therefore be interpreted with caution. The analysis of developments in the exchange rate from May 2000 to January 2003 is discussed in more detail in Bjørn Naug (2003): “Faktorer bak utviklingen i kronekursen – en empirisk analyse” (Factors underlying developments in the krone exchange rate – an empirical analysis), in Norges Bank’s Occasional Papers, no. 31 (Norwegian only). 3  These projections are discussed in more detail in Norges Bank’s Inflation Report 3/2003. The analyses are based on the technical assumption that the interest rate will move in line with expectations in financial and foreign exchange markets, implying that the interest rate will remain at the current level well into 2004. Thereafter, the interest rate in Norway is assumed to rise gradually in pace with interest rates in other countries. The forward exchange rate implies a moderate depreciation of the krone through the projection period. 4  BIS Review 53/2003  Share of employment back at trend As mentioned earlier, developments in the output gap are a measure of output stability.
2 Bank research (Franklin, Rostom and Thwaites, 2016), finds that the reduction in bank credit supply had an economically and statistically significant effect on companies: a 10% fall in the amount a firm could borrow is estimated to have reduced capital per worker by around 5-6%, labour productivity by 5-8% and wages by 7-9%, and increased the probability of bankruptcy by around 60%. 3 See page 52 of the Bank for International Settlements 87th Annual Report, available at http://www.bis.org/publ/arpdf/ar2017e.htm. Zombie firms are defined as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more. 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  4  Increased uncertainty has undoubtedly contributed to weak investment. Confirming the adage that bad things come in threes, companies have faced uncertainty about the economy, geopolitics, and economic 5  policy, all of which are likely to have clouded the outlook for how investments will perform (Chart 7). Greater uncertainty about returns means that fewer investment projects will be seen as worthwhile. This could help explain the “puzzle” of why hurdle rates in business investment have remained stubbornly high despite the weaker secular outlook for growth implied, for example, by long-term bond yields. The answer may be that the expected volatility of earnings growth has increased.