A stronger exchange rate will curb the rise in prices for imports, which directly and indirectly account for 40 per cent of goods and services in the consumer price index. A stronger krone weakens earnings and reduces activity in enterprises in the internationally exposed sector. This has an impact on enterprises’ capacity to pay, wage growth and price inflation. We do not expect a change in interest rates to have an immediate effect on inflation. Our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. Hence, the key rate is set with a view to achieving an inflation rate of 2½ per cent two years ahead. The social partners will take account of the inflation outlook in their wage negotiations. If there are prospects of higher inflation, the nominal wage increases will be higher. At the same time, higher wage growth means higher inflation. Developments in the labour market and wage formation are therefore important for interest rate setting in Norges Bank. It is also important to be aware that developments in labour costs may influence inflation, growth and employment differently in a system with a floating exchange rate that in a system with a fixed exchange rate.
Svein Gjedrem: Monetary policy and the outlook for the Norwegian economy Address by Mr Svein Gjedrem, Governor of the Norges Bank, at the Wage Bargaining Conference of the Electricians and IT Workers' Union in Vestfold and Telemark counties, Drangedal, 24 August 2001. *  *  *  The objective of monetary policy In spring this year, the Norwegian Government and the Storting (Norwegian parliament) laid down new guidelines for economic policy. The Government has announced that it will use the expected real return on petroleum revenues in the Government Petroleum Fund over the central government budget. The Government stresses that it will nevertheless use fiscal policy to smooth fluctuations in employment and activity levels. At the same time, Norges Bank was given a new operational mandate for monetary policy. Norges Bank shall set the key rate with a view to maintaining low and stable inflation. The inflation target is set at 2½ per cent. Low and stable inflation is the best contribution monetary policy can make to growth and prosperity. High and varying inflation weakens growth potential. The function of prices as a vehicle for information is impaired. Many choices will be based on a false foundation. Pay increases may be cancelled out by high price inflation. With high and varying inflation, it is difficult to determine whether higher house prices, for example, entail a real increase in the value of property, or whether the rise in prices is mainly due to a decrease in the value of money.