This applies both to companies competing on international markets and those supplying goods and services to the domestic market. In comparison with other countries, it is particularly productivity gains in service sectors that stand out. Examples are automated processes and swifter payments in the financial industry and improved inventory and management systems in commerce and transport. This results in lower production costs. 2  BIS Review 97/2007  Monetary policy is oriented towards low and stable inflation. The operational target is annual consumer price inflation of close to 2½ per cent over time. The objective of low and stable inflation provides the economy with a nominal anchor. Monetary policy shall also contribute to stabilising output and employment. In a small, open and decentralised market economy like Norway, and with our particular industry structure, there will be cyclical fluctuations. When economic agents have confidence that inflation is low and stable over time, the interest rate can also be set with a view to dampening the fluctuations somewhat. Monetary policy in Norway is in line with the monetary policy conducted by most central banks in the OECD area. The challenge of monetary policy is how the interest rate should be set ahead in order to bring inflation close to target while avoiding an overheating of the real economy. As a general rule, central banks influence the shortest money market rates via the key policy rate. However, economic agents’ consumption and investment decisions depend more on their interest rate expectations.
I believe many of those present here have a special interest in developments in the exchange rate, and will therefore discuss this in more depth towards the end of the address. The economic situation and the orientation of monetary policy The Norwegian economy is now in a cyclical upturn. Over the past three years, mainland GDP has grown by approximately 4½ per cent annually, and the strong growth has continued in 2007. In the first half of the year, annualised growth was close to 6 per cent, and even if GDP growth in the third and fourth quarters should be zero, annual growth will be well over 4 per cent. As the chart shows, there have not been four consecutive years with such strong growth since 1971. At the same time, productivity growth in the Norwegian economy has been strong, and the supply of labour has been ample. The growth capacity of the economy has therefore been high. Low interest rates, growth in public demand and in petroleum investment and vigorous international growth have resulted in high income growth in the household and business sectors. Moreover, low interest rates have made it more profitable to bring forward consumption. In addition to contributing to the increase in actual income, the sharp improvement in the terms of trade may have raised households’ income expectations. On balance, this has boosted demand for goods and services. So far, there are few signs of a slowdown in the Norwegian economy.