Flexible inflation targeting builds a bridge between the long-term objective of monetary policy, which is to keep inflation on target and provide an anchor for inflation expectations, and the more short-term objective of stability in the real economy. Monetary policy influences the economy with long and variable lags. This means we must look ahead when setting interest rates. I would therefore like to comment briefly on some international developments that are important to the Norwegian economy and the assumptions concerning developments in Norway on which Norges Bank’s assessments are based. The developments I will be  BIS Review 79/2005  3  describing are based on the analysis in Inflation Report 3/05 and the Executive Board’s assessments following the monetary policy meeting at the beginning of November. Prospects for global growth are still favourable. Among many of our trading partners, economic policy is oriented towards increasing activity. This will to some extent counteract the dampening effect of high oil prices. Domestic demand among main trading partners such as the euro area and Sweden is expected to edge up somewhat next year. For our trading partners as a whole, economic growth is expected to increase somewhat from 2005 to 2006. In the years ahead GDP for an average of our trading partners is expected to grow by around 2½ per cent. Very high growth in demand for oil contributed to rising oil prices in 2004 and the first half of 2005.
The output gap is a measure that expresses our assessment of total capacity utilisation in the economy. The output gap is defined as the percentage difference between actual output and potential output. Potential output indicates the level of output that is consistent with price and cost stability. The estimate for the output gap is uncertain, partly because the level of potential output is unobservable and must be estimated. Since official statistics on overall activity in the economy are not available immediately and are subsequently revised, the level of actual output will be uncertain. Our overall assessment is that capacity utilisation has picked up over the past two years and is now slightly higher than normal. In our estimation of the output gap, the result of technical calculations is compared with other sources of information about capacity utilisation in the economy. Information from Norges Bank’s regional network may indicate that overall mainland capacity utilisation is close to a normal level. However, there are signs of bottlenecks in production in some sectors of the economy. For example, capacity utilisation in the construction sector is very high, particularly in the southwest  BIS Review 79/2005  1  region of the country. There are signs of some skills shortages in the construction industry, in manufacturing and in some service industries. Even though growth in the Norwegian economy has been high for a long period, substantial labour shortages have not yet emerged in the economy as a whole.