Prospects for weaker growth and lower inflation imply a lower interest rate than presented in the interest rate projection from our previous forecast in December. There is also a risk that the global downturn will be deeper and more prolonged than expected. If this proves to be the case, growth in the Norwegian economy will not pick up as quickly and inflation will fall more sharply than we currently assume. The objective of avoiding a pronounced downturn indicates in isolation that the interest rate should be rapidly reduced to a low level. On the other hand, we have already made substantial reductions in the key policy rate. With a low interest rate, households may save less and the turnaround may occur more rapidly than we assume. This indicates in isolation that changes in the interest rate should be gradual or that further interest rate cuts should be put on hold. Overall, the outlook and balance of risks suggest that the key policy rate should be gradually reduced further to a level of around 1 per cent in the second half of 2009. This is about 1 percentage point lower than in Norges Bank’s forecast from 17 December last year. With the low interest rate added to government fiscal measures, our analysis indicates that growth in the economy will be positive from the second half of this year. Growth will be driven by a rise in private consumption as a result of a low key policy rate, growth in real wages and higher government transfers.
Oil futures prices have fallen and indicate an oil price of around USD 60 per barrel in 2010. Other commodity prices that are important for the Norwegian economy have also fallen sharply. Metal prices are particularly sensitive to cyclical developments. Futures prices for a selection of raw materials indicate unchanged or moderately rising prices in the next few years. Many countries that have been hit by the economic setback will see an improvement in their terms of trade and growth in their disposable income. The current downturn followed a period of very high global and domestic economic growth, supported by favourable trading conditions. Few countries benefited more than Norway from  1  Folketrygdfondet will manage the new Government Bond Fund. 2  The Government has increased the capital of Kommunalbanken Norway (the local government funding agency), it has increased the scope of GIEK (the central government export credit agency) and Innovation Norway, and has offered state loans to Eksportfinans Norway (the credit institution for export financing). 2  BIS Review 42/2009  the economic upturn, which drove up prices for oil, gas and other export commodities. At the same time, an increasing number of cheap consumer goods were imported from new EU countries and from Asia. Norway’s real disposable income increased by more than 40 per cent from 2002 to 2008, more than that of any other western country. But our terms of trade are now deteriorating.