Interest rate expectations for the next few years largely depend on the economic outlook and market expectations concerning monetary policy. In the long term, up to ten years, market participants are unlikely to have any particular expectations concerning cyclical fluctuations. The forward rate may then be interpreted as the sum of the expected real interest rate and expected inflation when the economy is in balance. Without limitations on capital movements, the real interest rate must be expected to develop approximately the same across countries over time. If there are no systematic differences in the risk premium between countries, differences in forward rates may be interpreted as differences in inflation expectations between countries. In the euro area, the inflation target is below, but close to 2 per cent. This results in an inflation differential of ½ - 1 percentage point against Norway. An investor must therefore have an interest rate in Norway that is ½ - 1 percentage point higher than in Germany in order to achieve the same expected real return in the two countries. Following the introduction of the inflation target, the difference between German and Norwegian forward rates was about 1 percentage point for a long time. So far in 2003, this differential has been somewhat lower. This interest rate differential indicates that the market is confident that we will achieve the inflation target. This line of reasoning can also be reversed. Given stable inflation expectations of 2½ per cent, i.e.
Prices and wages in the international economy But there are still areas of risk in the international context, associated mainly with the uncertainty over the course of US economic policy, with the imbalances building up in the Chinese economy and with the unfavourable data emanating from the United Kingdom, which is apparently beginning to feel the effects of its exit from the EU. In the euro area the solvency and profitability of the banking sector must be improved and the level of NPLs lowered, as they weaken the impact of the monetary impulses on productive activity. Furthermore, there are still no firm signs that inflation has moved onto a rising trajectory drawing it permanently closer to our objective of 2%. This can be seen in the measures of core inflation, which strip out the more volatile components of prices and which are sound indicators of the latent inflationary pressures in the economy. These measures of inflation have remained anchored around 1% over the last three years. Behind this inflationary behaviour are, among other factors, highly contained wage growth in the euro area as a whole – and I insist, the euro area in its entirety – that contrasts with the improvement in employment. Compensation per employee has sustained increases of close to 1.2% since mid-2014, far below its historical average which is at slightly over 2%.