Svein Gjedrem: The outlook for the Norwegian economy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Bergen Chamber of Commerce and Industry, Bergen, 11 April 2007. 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 15 March and in Monetary Policy Report 1/07. *  *  *  Introduction Monetary policy in Norway is oriented towards low and stable inflation with annual consumer price inflation of close to 2.5 per cent over time. Low and stable inflation provides enterprises and households with an anchor for inflation expectations. Given that there is confidence in the nominal anchor, monetary policy shall also contribute to stable developments in the real economy. Norges Bank therefore operates a flexible inflation targeting regime. This means that weight is given to both variability in inflation and variability in output and employment in interest-rate setting. Flexible inflation targeting builds a bridge between the long-term objective of monetary policy, which is to keep inflation on target and provide an anchor for inflation expectations, and the more short-term objective of stability in the real economy. Low inflation and solid growth in the Norwegian economy Inflation in Norway decelerated markedly from the late-1980s to the mid-1990s and has since been low and stable, and fairly close to, but somewhat lower than the target of 2.5 per cent, with considerably lower variability than earlier.

But when capacity utilisation increases, the interest rate will have to be raised gradually towards a more normal level. Even though price inflation has deviated from the target for a period, there are no indications that economic agents have changed their view of future inflation. Expectations are stable. When households and businesses make their saving and investment decisions and set prices, they can safely ignore the possibility of sustained, marked increases or decreases in the general price level. The business sector can base their decisions on the assumption that wage and cost inflation will not revert to the level seen in the 1970s and 1980s. Employees also know that their pay increases will not be eroded by inflation. Low and stable inflation is a credible objective. 4. Are we equipped for the future? Norwegian enterprises have access to new markets and are encountering increasing competition. New businesses are emerging while others are scaling back and closing down. We have behind us 15-20 years of fairly sound macroeconomic management, which provides a good basis for growth in the Norwegian economy. The banking system and securities markets are highly developed. Generally, only unprofitable projects lack financing and capital. In a take-over, new owners completely re-haul poorly run operations. In Norway, as in other industrialised countries, private ownership is firmly protected. This is a competitive advantage and a fundamental precondition for a market economy to function over time. We like to believe that we have a highly educated labour force, and find some support for this in OECD surveys.