On the basis of these analyses, a strong real krone exchange rate and weak competitiveness will apply to a period from the beginning of the 1970s in which the petroleum industry is expanding and we are reaping the largest economic benefits. Main features of the economic situation Inflation is low. The rise in prices is being curbed by the appreciation of the krone in 2002, the fall in prices for imported consumer goods in foreign currency and strong competition in many industries in Norway. Monetary policy in Norway is oriented towards returning inflation to target. The sight deposit rate has been lowered to 1.75 per cent. Low interest rates and the global upturn are stimulating activity in the Norwegian economy. The output level will be somewhat lower than implied by the trend level. This means that the output gap is projected to approach zero, but will continue to be marginally negative in 2004. Growth in the Norwegian economy is projected to pick up markedly this year and remain relatively high next year. The most important contribution comes from private consumption, fuelled by low interest rates and high real wage growth. The global upturn will probably have a positive effect on the internationally exposed sector. Petroleum investment will continue to expand in the next couple of years. Mainland business investment is also expected to pick up gradually. In recent years, many enterprises have rationalised operations.
The analyses are also based on the assumption that the krone exchange rate will shadow the path for the forward exchange rate as observed on 24 June. At that time, market pricing reflected expectations of a fairly stable exchange rate ahead. 5  See Akram, Farooq Q. (2003): “Reell likevektsvalutakurs for Norge” (Real equilibrium exchange rate for Norway), in Norsk Økonomisk Tidsskrift 118, pp 89-112. BIS Review 47/2004  5  Given the assumptions underlying the projections in the last Inflation Report, inflation will be considerably lower than the inflation target in the period to the summer of 2006. Monetary policy also places emphasis on avoiding imbalances in the real economy. Capacity utilisation in the economy is rising, but the output gap, as it is measured by Norges Bank, will only be marginally positive during the period. Our assessment is that monetary policy should be aimed at increasing inflation at a somewhat faster pace than projected in the last Inflation Report. In connection with the monetary policy meeting on 11 August, the Executive Board stated that the inflation outlook may imply an unchanged interest rate for a longer period than implied by the interest rate assumptions in the last Inflation Report. On the other hand, the prospect of continued low inflation in Norway implies that Norway should not be the frontrunner when interest rates are increased in other countries.