Growth in real wages is markedly higher than underlying growth in productivity. This is why unemployment is rising. Businesses must adjust their workforces to maintain profitability, or close down or relocate production. The inflation target is the vehicle for monetary policy’s contribution to stabilising output and employment. In spite of high wage growth, the strong krone has kept inflation at a low level. Global stagnation has changed the domestic inflation outlook in recent months. The tight monetary stance is reflected in the strong krone. A gradual easing of monetary policy would thus seem appropriate. As long as inflation remains low and stable, any substantial deviations in the krone exchange rate over time will have an impact on business and industry. As a result, the krone exchange rate will tend to return towards its long-term mean. The interest rate differential between Norway and other countries has resulted in a strong krone. The wide interest rate differential is due to the historically low level of interest rates abroad. If the world economy experiences prolonged stagnation and the krone remains firm, a markedly lower interest rate will lead to a weakening of the krone and mitigate the effects for Norway. Any fiscal slippage will contribute to maintaining a strong krone.
The structure and condition of the financial system at any given time is determined by historical factors, economic and market conditions, the regulatory environment, technology, and culture and ethics. The Central Bank and the regulatory environment are also part of the financial system. The public sector can affect developments in the financial system through the regulatory framework, through transactions with the system – not least through the Central Bank – and by affecting culture and ethics. At present, the system is shaped by the financial crisis and the responses to it, including the capital controls. It is a relatively homogeneous system dominated by three domestic-oriented banks with similar business models and risk profiles. The capital controls, implementation of international regulations, and more stringent Icelandic regulations on foreign exchange risk all affect the banks. The capital controls will be lifted, but much of the regulatory environment will remain. Risk in the financial system has diminished markedly in recent years as resilience has grown, which can be seen in capital adequacy and funding; furthermore, liquidity relative to the scope of operations is much greater than before the crisis. The three largest commercial banks’ combined capital amounted to 669 b.kr. at the end of 2015. The banks’ equity ratios have risen by nearly a third since 2010, from 21% to 28%. In real terms, their equity has increased by 180 b.kr. over this period. Furthermore, the banks’ foreign exchange imbalances have been reduced, and the regulatory framework prevents excessive risk-taking in foreign currencies.