At the same time, growth in the economy was so strong that a higher interest rate would not increase the risk of a deflationary recession to any significant extent. The interest rate increase of 0.25 percentage point was in itself modest. We did indicate, however, that it was more likely that the next change in interest rates would be an increase. Growing evidence of continued pressures in the economy emerged during the summer of 2000. The wage settlement resulted in an increase in labour costs of about 5 per cent in both 2000 and 2001. The projections for price and cost inflation in the years ahead were revised up as a result of the higher rise in labour costs, a weaker effective krone exchange rate and stronger external inflationary impulses. It appeared that the growth pause in the Norwegian economy would be shorter than expected. Against the background of an upward revision of the projections for price and cost inflation in the next few years, Norges Bank decided on 14 June to raise the interest rate by 0.50 percentage point. This was followed by another increase of 0.50 percentage point on 9 August. We then indicated that it was more likely that the next change in interest rates would be an increase, but also stated that substantial steps had been taken in the adjustment of the interest rate that was appropriate on the basis of our analyses.
Jarle Bergo: Monetary policy and business cycles Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at Kunnskapsparken Bodø, 25 September 2003. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 17 September and on previous speeches. The Charts in pdf can also be found on the website of the Norges Bank. *  *  *  The operational target of monetary policy as defined by the Government is inflation of close to 2.5 per cent over time. The inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. The inflation target also provides a framework for monetary policy’s contribution to stabilising output and employment. This intention is also expressed in the Regulation on Monetary Policy. High demand for goods and services and labour shortages normally point to higher inflation. When interest rates are increased, demand falls and inflation is kept at bay. When demand is low and unemployment rises, inflation will tend to slow. Interest rates will then be reduced. Norges Bank sets the interest rate so that future inflation will be equal to the inflation target of 2½ per cent. The interest rate has been reduced since December last year in response to the change in the inflation outlook.