BIS Review 44/2006  3  Norges Bank seeks to set the interest rate with a view to achieving a reasonable balance between the objective of stabilising inflation at target and the objective of stabilising developments in output and employment. Interest rates are projected to increase gradually in the years ahead, up to a more normal level. Interest rates are also expected to increase in other countries. Capacity utilisation in the Norwegian economy is now fairly high and will contribute to bringing inflation up towards the target in the course of the next 2-3 years. In the account presented after the monetary policy meeting of the Executive Board on 26 April, it was stated that there are prospects of another interest rate increase in the second quarter – at the monetary policy meeting in May or June – and a further increase thereafter. In addition to projecting developments, we wish to highlight the uncertainty surrounding developments ahead. The projections for the interest rate and other economic variables are based on incomplete information about the current economic situation and the functioning of the economy. 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 ample supply of labour has made a contribution in this context. This situation is now changing. There are now limited idle resources.
In a period of increasing cross-border labour flows, major technological advances, changes in competitive conditions and substantial changes in trade patterns, inflation will probably, with our very open economy, show somewhat wider variations, as witnessed over the past two to three years. The operational objective of monetary policy is low and stable consumer price inflation. Over time, the consumer price index will provide a guide for assessing monetary policy. Monthly variations in consumer prices reflect temporary conditions which monetary policy cannot control. According to Norges Bank’s remit, the Bank shall not normally take account of direct effects on consumer prices of changes in interest rate, excise duties and extraordinary, temporary disturbances. Energy prices have traditionally shown wide variations. Hence, a price index that is adjusted for variations in such prices as well as for indirect taxes can be a measure of underlying inflation in the economy. However, such a price index does not take account of that fact that the trend rise in energy prices has been higher than for other prices and is therefore not a perfect measure of underlying inflation. In the past 10-20 years, energy prices and taxes have pushed up consumer prices annually by an average 0.35 percentage point. Even when taking into account trend increases in energy prices, inflation is still moderate. Experience indicates that inflation expectations remain stable even if inflation varies somewhat, as long as the interest rate is used actively to curb the effects.