Returns have fluctuated considerably since the Petroleum Fund made its first investments in equity markets in 1998. Since 1998, the first whole year the Petroleum Fund invested in equities, the annual excess return from active management has been close to half a percentage point. The corresponding krone amount is about NOK 18 billion. Petroleum revenues generally involve substantial, but uneven currency inflows into Norway. The currency flows might have resulted in a strong krone and large variations in the exchange rate. The Petroleum Fund acts as a buffer and dampens the wide fluctuations in the krone exchange rate that petroleum revenues might otherwise have generated. An increase in petroleum revenues will result in higher capital outflows from the Petroleum Fund. Operators in the foreign exchange market may at times have a tendency to underestimate the Fund’s function as a stabilisation mechanism. The capital outflows through the Fund contribute to both curbing the appreciation of the krone and maintaining its stability. Since the summer of 2004, the krone exchange rate has appreciated by about 5 per cent, as measured by the trade-weighted exchange rate index (TWI). The chart shows the krone exchange rate and oil spot prices from 1999. The chart indicates that there is no clear relationship between the nominal exchange rate and oil spot prices over time. An appreciation of the krone has accompanied higher oil prices in some periods and lower oil prices in others. The correlation between oil prices and the nominal exchange rate has therefore varied over time.
Potential growth will then be at a higher level. On the other hand, increased demand from countries such as China and India combined with a synchronised economic upturn could contribute to the global output gap being closed more rapidly than we at present assume. In this case, inflation could rise earlier than anticipated. The major question is, of course, whether the low international price pressure will endure, and, if so, how long. One factor indicating that the developments we see now are a more lasting phenomenon is the combination of more independent central banks with inflation-targeting and increased global competition. In addition, rapidly-growing low-wage countries like India and China still have some way to go before they are completely integrated into the global economy. Events that could radically alter the picture are, for instance, increased protectionism and introversion, extensive armed conflicts and irresponsible fiscal policy. Protectionism may lie close to hand as a response to increasingly troublesome competition and difficulties in adapting national labour markets and production patterns, which is indicated, for instance, by the present US debate prior to the presidential elections. However, there is little that now indicates that these factors could grow sufficiently to outweigh the trend towards increased integration and globalisation. The conclusion is therefore that the low-inflation economy appears to have become established, although we cannot take it for granted. What consequences will this have for monetary policy in the future? Monetary policy in a low-inflation economy The target for monetary policy is price stability.