This may give rise to considerable challenges in terms of the Government’s and the Storting’s (Norwegian parliament) ability and will to maintain a firm fiscal stance. Under a system designed to maintain exchange rate stability, it is important that the authorities actually manage to implement fiscal policy in such a way that pronounced and undesirable cyclical fluctuations do not occur. During the last cyclical upturn, fiscal policy has been relatively tight, but the tightening element became weaker as growth gained momentum. Fiscal policy should have been tighter in 1996, 1997 and 1998. Another lesson from this period is that investment in the petroleum sector should be managed better in order to avoid fluctuations in the mainland economy. One cannot expect the central government budget to be able to counter the shocks to the mainland economy originating from the wide fluctuations in demand from oil companies. 2) Internal instability Fiscal policy has not had a sufficient stabilising effect on the economy in recent years. This has given rise to a dilemma for the social partners involved in the income settlements. Moderate wage settlements made a substantial contribution to achieving broad-based employment growth from 1992. In the period 1993-1998, employment rose by more than 250 000, while unemployment fell from about 6.5 per cent to below 3 per cent, the lowest rate BIS Review 10/1999  –3–  recorded for 10 years. Whereas 20 unemployed were competing for each vacancy at the employment offices in 1993, the ratio was reduced to a little more than 2 in 1998.
9) Formulation of monetary policy Norges Bank reduced its key rates by 0.5 percentage points effective from today. This decision came in response to developments in money and foreign exchange markets and the prospect of reduced pressures in the real economy. The outlook for the Norwegian economy has changed since Norges Bank raised its key rates in August. The forecasts for growth in the world economy have been revised downwards and persistently low oil prices have reduced demand in the oil sector. In addition, a tight government budget for 1999 and the high interest rate level are having a restraining effect on growth. At the same time, the krone has appreciated recently. This lays the foundation for slower price and wage inflation in the years ahead, as estimated by Norges Bank in its December Inflation Report. Developments in recent weeks have confirmed this picture, providing room for a slight reduction in interest rates. According to the Exchange Rate Regulation, “... in the event of significant changes in the exchange rate, monetary policy instruments shall be oriented with a view to returning the exchange rate over time to its initial range”. The guidelines provide considerable scope for discretion in the conduct of monetary policy. It is Norges Bank’s task to exercise this discretion. Interest rates are set with a view to returning the krone exchange rate over time to its initial range. Even with this interest rate reduction, the interest rate differential against European countries is substantial.