Partly reflecting the improvement in the terms of trade, the nominal krone exchange rate has remained strong. Wage costs in Norway are now very high compared with other countries, measured in a common currency. The current situation is considerably different from that of the mid-1990s. At that time, performance in the manufacturing sector was strong partly owing to solid competitiveness. Today, the manufacturing sector is faring well in spite of a strong krone and a high cost level. The reason is the unusually buoyant markets for Norwegian goods. At the same time, the strong krone exchange rate has eased the impact of revenue gains. In periods, the effects on the krone may nevertheless be somewhat excessive, partly owing to the low level of inflation in Norway. Low interest rates, increased petroleum investment, strong global growth and the improvement in the terms of trade have contributed to solid growth in the Norwegian economy. Capacity utilisation has probably reached a higher-than-normal level, and the cyclical upturn is continuing. Enterprises are steadily increasing their debt to finance investments. So far, the cyclical expansion has been marked by strong production growth, with ample labour supply and unusually low inflation. 1  2  Adjusted for lower maximum day-care rates. BIS Review 44/2006  For a long time, employment growth measured by number employed was lower than in previous upturns, partly reflecting the fall in sickness absence as of summer 2004. In 2005, the number of person-hours worked increased relatively rapidly and productivity growth picked up.
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.