But the longer it persists, the more likely it is that sterling prices will adjust to euro prices, creating the potential for quite long term impacts on UK inflation relative to the euro area. That is what we appear to be seeing at the moment, with the historic relationship shown in Chart 6 suggesting that UK inflation could run 1 to 2 percentage points above euro area inflation for a considerable while unless there is some noticeable appreciation in the value of the pound. The counterargument to this view is that the recent substantial depreciation of the pound against the euro and other currencies is needed to support a rebalancing of the UK economy and sustain the growth of UK manufacturing and other internationally competitive sectors of the economy. But the extent of the depreciation of sterling since 2007 has been much greater than we have seen in previous rebalancing episodes, such as the mid-1990s – which raises the question whether sterling has fallen much further than needed.5 And it is not clear  5  8  See Sentance (2011) for a comparison of the recent fall in sterling with previous episodes. BIS central bankers’ speeches  that the export-based manufacturing activities which could benefit from a large depreciation have the capability to respond quickly by scaling up output – particularly when their demand is already being boosted by a recovery in global demand.
One Norwegian krone was worth 0.40323 grams of fine gold. In the latter part of the 1800s, Norway benefited from free trade and free capital movements and became a relatively prosperous country. The standard of living in Norway did not lag behind that of Sweden. The currency union was maintained after the political union with Sweden was dissolved. The agreement lost its practical significance after the gold standard was suspended in 1914. The agreement was not formally terminated until 1972. From an economic viewpoint, the dissolution of the union in 1905 was a painless process. Economic developments were favourable up to World War I. International real interest rates have fallen The interest rate level is lower today than in 1905. In fact, Norges Bank has not allowed the key rate to be this low since the Bank was established in 1816. This partly reflects international conditions. In many countries interest rates were reduced considerably when the economic situation took a turn for the worse early in 2000. Interest rates adjusted for inflation, i.e. real interest rates, are now also low. Low real interest rates may be ascribed to several factors: Inflation has been low for such a long period that savers require a low premium as a hedge against unexpected inflation in the future. In order to prevent an appreciation against the dollar, many Asian central banks have been buying US government bonds, thereby pushing down yields.