Compared to the fluctuations in the first part of the period we see here, from 2002 to date, the krone exchange rate has been relatively stable in recent years, but there has been some short-term movements. An appreciation of the krone has in some periods occurred in tandem with higher oil prices and in other periods with lower oil prices. The krone appreciated when the interest rate differential against other countries was high in 2002, but as interest rates in Norway moved down to the level among trading partners, the value of the krone fell back. In recent years, the actual interest rate differential against trading partners has been close to zero. Earlier analyses conducted at Norges Bank have shown that other factors, such as expected volatility among major international currencies and developments in US equity indices, may have been factors behind developments in the krone exchange rate, but the effects vary over time. This reflects among other things shifts in exchange market themes. 1 Shifting themes in exchange markets make it difficult to predict short- and medium-term exchange rate developments. The exchange rate projections in the monetary policy reports are based on the theory of uncovered interest rate parity. According to the theory, the return on financial investments will be the same irrespective of the currency involved. If Norwegian interest rates are higher than external interest rates over a period, the krone exchange rate must depreciate during that period or NOK-denominated investments generate an excess return.
So you may be reassured to hear that we spend most of our time worrying about the risks that could throw the UK economy off course; and arguing about how to respond appropriately. So what are the main risks facing us now? Last year saw the fastest growth in world output in three decades. We expect growth this year to be less spectacular but still robust. But while the US and China are still expanding strongly, growth has showed signs of faltering in Japan and, to a lesser extent, in our major overseas market, the euro area, and especially Germany. We think this weakness is likely to prove temporary, but we could be disappointed. Unbalanced growth creates strains. The US has a large current account deficit, which is mirrored by surpluses in the other major trading blocks. The risk is that a better balance will only come about through sharp adjustments in exchange rates and a marked increase in US savings, which may cause a slowdown in global activity. Closer to home, there is uncertainty about the near term momentum of household spending, by far the largest influence on domestic demand. While it is difficult to be confident about the path of retail sales since the autumn, there is little evidence of much underlying buoyancy. Retail sales are not the whole story, and our central view is that any weakness in consumer spending is likely to be temporary. But we could easily be wrong.