Svein Gjedrem: Economic perspectives Annual address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the meeting of the Supervisory Council of Norges Bank, Oslo, 19 February 2004. *  *  *  Introduction There is now growth in the Norwegian economy. Oil prices are high. Capacity utilisation in the mainland economy is at the level prevailing in the mid-1990s. Wage growth is slowing. White-collar workers have lowered their wage demands, and there are prospects of a moderate main settlement this spring - the first in eight years. The value of the krone is on a par with the mid-1990 level. The interest rate level is in line with the level among our trading partners. In that respect, there is equilibrium in the Norwegian economy at present. But it is fragile. The international division of labour is shifting, and when faced with major changes it is a disadvantage for Norwegian business and industry that costs are high. Inflation is very low. Short-term interest rates abroad have been unusually low over the past 2½ years, and there are no prospects of a considerable increase in the near term even if the world economy is expanding. Last year, interest rates abroad acted as a magnet on Norwegian interest rates. We now have the lowest nominal interest rate level recorded in decades. Norwegian households are optimistic and are borrowing and investing in housing and property. This stands in contrast to corporate behaviour.
Constant 2000 prices 1200  1200  1000  1000 Trend Actual  800  800  600  600 1980  1984  1988  1992  1996  2000 2003  Sources: Statistics Norway and Norges Bank  Monetary policy credibility Expectations play an important role in price and wage formation. Expectations concerning inflation and economic stability are of crucial importance for the foreign exchange market. Inflation expectations also influence wage demands and pricing in the business sector. With confidence in monetary policy, expected inflation in the long term will be close to the inflation target. This alone contributes to stabilising inflation. Surveys indicate that enterprises, the social partners and other economic agents expect inflation to be 2½ per cent over time. Financial market participants also expect that inflation will be 2½ per cent ahead, as implied by long-term bond yields. A flexible exchange rate The krone exchange rate is an important channel for monetary policy. The krone fluctuates. This is not surprising because other countries’ currencies also fluctuate. The krone exchange rate is the price of our currency measured in a foreign currency. Developments in other countries are just as important for the krone as developments in the Norwegian economy. Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest rates as well as output and employment. A structural feature of open economies like the Norwegian economy - with a national currency - is that the exchange rate fluctuates.