In the longer term, we nonetheless believe that monetary policy and the interest rate differential against other countries are important exchange rate determinants. However, there will be short-term exchange rate fluctuations not necessarily in tandem with the interest rate differential. The chart shows the effective exchange rate for Norway and other small countries with inflation targeting. The fluctuations in the Norwegian krone are not particularly wide compared with the exchange rates of Switzerland, the UK and Sweden. In relation to the euro, the krone exchange rate has still varied between 7.22 and 9.25 since mid-1998. If such variations feel uncomfortable, it is possible to hedge against them. The forward exchange and options markets have expanded in recent years. A deeper market reduces transaction costs and it is easier to find counterparties. This has provided companies with greater scope for hedging against short-term foreign exchange risk. The use of instruments that reduce the risks associated with a floating krone is also increasing in Norway. However, in the somewhat longer run, exchange rate changes will have an impact. This is important if the exchange rate is to act as a shock absorber: When economic activity is high, an appreciation of the krone will restrain activity. Conversely, when there is a need for stimulating the economy, a weaker krone will contribute to growth. Over a somewhat longer period, it is not the nominal exchange rate that is the most important. It is developments in competitiveness that is of the greatest significance for the business sector.

Jarle Bergo: Cyclical developments, monetary policy and the krone exchange rate Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at Østfold University College, Sarpsborg, 28 September 2006. The text below may differ slightly from the actual presentation. The speech is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 27 September, Inflation Report 2/06 and previous speeches. *  *  *  Cyclical developments The cyclical upturn in the Norwegian economy continues. Growth has been strong since mid-2003. Real income growth has been solid in both the household and corporate sectors. Household demand, which spurred the recovery, is still on the rise. Many Norwegian export companies are operating at full capacity with solid profit margins. High prices for Norway’s export goods have contributed to a strong improvement in Norway’s terms of trade. At the same time, there is solid growth in general government demand for goods and services. Fixed investment has gradually become an important driving force behind the economic upturn. Over the past couple of years, increased mainland business investment has contributed to the upturn in the Norwegian economy. Corporate profitability is high and companies are positive about the outlook ahead. The order book situation in manufacturing is highly satisfactory, and optimism appears to be high in most business sectors. According to our regional network, the market situation is also positive for corporate services. Petroleum investment has reached a high level after three years of strong growth.