Chart 7  Krone exchange rate 6,0  75 Basket index  80  ECU index  85  6,5 7,0  90  Euro  95  7,5  100  8,0  105  8,5  110  9,0  115 80 82 84 86 88 90 92 94 96 98 Source: Norges Bank Legg inn filadresse her  The pressure against the krone exchange rate was particularly strong in the autumn of 1998. The crisis, first in Asia and later in Russia, led to considerable turbulence in international markets. At the same time, pressure in the labour market led to high wage increases, while the current account was negatively affected by a fall in export prices, combined with increases in imports. All in all, these factors contributed to creating depreciation expectations. Thus, fluctuations in oil prices represent only one of many causes of exchange rate variability over the past few years. Monetary policy is aiming at exchange rate stability. The krone exchange rate depreciated gradually through the first half of 1998, and in August there was a strong pressure against the krone. Norges Bank responded by increasing its key rates seven times through 1998, with a total of 4½ percentage points. After the last interest rate increase, in August 1998, the interest rate on banks’ deposits in Norges Bank was 8%. The strong increase in interest rates was not sufficient to bring the exchange rate back to its initial range.
As long as the increase in petroleum income is kept outside the domestic economy, there will be less need for structural change and thus less need for exchange rates to change. The Petroleum Fund serves many purposes. It is a means of storing wealth and redistributing income from oil extraction between generations, of buffering against changes in oil prices, and of facilitating demand management. Thus, the Fund facilitates the fiscal policy tasks of maintaining the desired size of the exposed sector and stabilising the economy. Chart 6  Objectives of the Government Petroleum Fund  • Allocate wealth • Distribute income over generations • Serve as a buffer against variability in oil prices • Provide financial leeway for stabilisation  Legg inn filadresse her  5  BIS Review 121/1999  North Sea oil and gas reserves are part of Norway’s economic wealth. Extracting the oil and allocating the revenues to the Petroleum Fund is a way of transforming this wealth into financial assets abroad. The purpose of accumulating capital in the Fund is to redistribute petroleum revenues between generations and ensure the long-term stability of state finances. The larger the Fund, the less dependent Norway will be on petroleum revenues in the future, and the more prepared we will be to meet the challenge of an ageing population. Furthermore, the Petroleum Fund acts as a buffer against short-term variations in petroleum revenues by separating the cash flow from oil extraction from current expenditure.