Norwegian companies have also been able to be considerably bolder in undertaking new assignments and investments knowing that they can procure labour throughout Europe. In addition to increased labour inflows from Poland, Lithuania and other central European countries, we have long benefited from inflows of labour from Sweden. Many workers are on temporary assignment and their consumption is primarily concentrated in their home country. The Norwegian economy has seen a net capacity increase. Third, the Norwegian business sector has been quick to integrate information technology. 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 banks and other 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. In Norway, monetary policy is oriented towards low and stable inflation. The operational target is consumer price inflation of close to 2.5 per cent over time. We operate a flexible inflation targeting regime. Both variability in output and inflation are given weight in interest-rate setting. BIS Review 15/2007  3  A decline in import prices, ample supply of labour and high productivity growth have boosted the growth potential of the Norwegian economy and led to very low inflation. Against this background, it has been appropriate to stimulate demand for goods and services. We consider a normal real interest rate to be in the order 2½ to 3½ per cent.

There are also signs that productivity growth in service sectors is slackening. We are now seeing the first signs of higher wage growth. We cannot ignore previous episodes of abrupt shifts in wage growth during boom periods. On the other hand, improved labour market adaptability and the supply of foreign labour may have a dampening impact. Unemployment may thus stabilise at a lower level than earlier. Moreover, the social partners’ experience of the impact of substantial wage increases on interest-rate setting may also restrain pay increases in the centralised settlements. Economic policy will increasingly have to reflect the capacity constraints facing many Norwegian enterprises. Given the high level of activity and the prospect of a pick-up in inflation, it is appropriate to increase the policy rate from today’s level of 3.75 per cent. We envisage a gradual interest rate increase towards a more normal level of a little more than 5 per cent. Economic developments are uncertain. The uncertainty surrounding the interest rate ahead is illustrated by the shaded area in the chart, which is intended to capture the outcome with a 70 per cent probability. 6  BIS Review 15/2007  In Norway, inflation fell markedly from the end of the 1980s up to the mid-1990s and has subsequently been low and stable, with considerably less variability than earlier. Inflation has averaged around 2 per cent over the past 5-10 years, i.e. somewhat lower than the target. Thus, the growth potential of the Norwegian economy has been strong and higher than expected.