Key rates and rise in labour costs Per cent Interest rates 8  New Zealand Australia Canada UK US Denmark Euro area  6  Norway  4  Sweden 2  Japan 0 0  2  4  6  8  Rise in labour costs, 1998-2000  Norwegian key rates are currently 1½ percentage points higher than in the US, 2¼ percentage points higher than in the euro area, and 3 percentage points higher than in Sweden. In some countries, short-term interest rates are now moving down and in other countries expectations of interest rate increases have receded. Norges Bank has a neutral bias with regard to interest rates developments, partly reflecting price and cost developments in Norway, as illustrated in the chart. In general, it can be argued that when wage and cost inflation is expected to rise and deviate from the rate of increase in the euro area, or when unexpected upwards shifts in labour costs occur, interest rates must be raised to avoid rising inflation and a weaker krone. In our open economy, with a floating exchange rate, it can be assumed that an increase in wage growth of one percentage point will gradually translate into a corresponding increase in price inflation unless the wage increases are anchored in higher productivity. The magnitude of the increase in interest rates must be consistent with this. First, nominal interest rates must be increased in order to maintain real interest rates.
The government’s five largest stakes in Norwegian companies can be roughly estimated at NOK 300 billion. In general, concentrated ownership requires a more strategic ownership approach and gives rise to higher risk than diversified ownership. 10  BIS Review14?/2001  Risk associated with state ownership NOK bn 300  The five largest state enterprises Petroleum Fund's bonds Petroleum Fund's equities  200  100  National Insurance Fund's private bonds  National Insurance Fund's equities  0 0  10  20  Return risk  This is illustrated further in the chart. The composition of government assets is broken down into equities and bonds in the Petroleum Fund and the National Insurance Fund and government ownership interests in the five largest companies. The horizontal axis provides a normal measure of risk, in other words the standard deviation of the return. The risk is estimated on the basis of the historical performance of the companies’ share prices. For unlisted companies, we have used share price performance for comparable international companies. Higher risk means that the assets are more exposed to fluctuations in return. As a whole, the return on the Petroleum Fund and the return on private bond holdings in the National Insurance Fund feature a moderate risk profile. The risk is higher for both the National Insurance Fund’s equities and the state’s ownership interests in the five largest companies. For a given expected return, the owner should aim at reducing risk because future income will then be more secure.