In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account in Norges Bank’s conduct of monetary policy. We therefore look at different measures of underlying inflation. The chart shows inflation adjusted for tax changes and excluding energy products, CPI-ATE, and two other measures. This does not provide a precise measure, but an interval for underlying inflation on the basis of the different indicators. A weakness of the CPI-ATE as a measure is that the variable has not captured the higher rise in energy prices compared with the rise in prices for other goods and services in recent years. Over the past two and half years, underlying inflation has been fairly stable and is estimated at between 1 and 1½ per cent. The indicators of underlying inflation have recently been in the upper end of this interval. 2  BIS Review 47/2007  The fall in inflation in 2002 was attributable to an increase in imports from low-cost countries and a strong krone exchange rate. Prices for imported consumer goods fell sharply. In 2003, slower growth in both Norway and other countries also pushed down the rise in prices for domestically produced goods and services. In addition, competition was intense in many industries. In 2005, inflation appeared to be rising, but abated again in 2006, primarily reflecting the low rise in prices for domestically produced goods and services.
According to the latest assessments of the Executive Board, the overall outlook suggests that it would be appropriate to raise the interest rate gradually to about 5 per cent in the course of this year and to a somewhat higher level in the period to summer 2008. At its meeting on 25 April, Norges Bank’s Executive Board decided to leave the key rate unchanged at 4.00 per cent. The Executive Board considered the alternative of increasing the interest rate at that meeting. There is obviously considerable uncertainty surrounding the projections. The projections are based on our assessment of today’s economic situation, the outlook for developments in other countries, the functioning of the economy and the conditions necessary for reaching the inflation target. The chart  BIS Review 47/2007  11  shows that we must be prepared for developments in inflation and output that may differ from the central path. This may also imply that the interest rate may be lower or higher than our current projections. Allow me to summarise: The fall in prices for imported goods and services and the increase in export prices have provided the Norwegian economy with an appreciable income boost. The mainland economy has expanded rapidly in recent years. At the same time, inflation has remained low. Increased efficiency and an ample supply of labour have made a contribution to these developments. There are now limited idle resources. Monetary policy increasingly reflects that many Norwegian enterprises are facing capacity constraints and that inflation will pick up.