Investment in the petroleum sector is an important source of business cycle fluctuations in Norway. Investment rose sharply in the 1970s and 1980s and reached a peak in 1998. Mainly as a result of persistently high oil prices and expectations that oil prices will remain high, investment in the Norwegian petroleum sector may again reach record levels this year. Norges Bank’s regional network currently reports a very high level of activity among suppliers to the petroleum industry. However, investment may decline as large development projects like Ormen Lange, Kristin and Snøhvit near completion. It is uncertain how sharp the fall will be, but today’s high level of exploration activity and a long period of high oil prices imply that petroleum investment will remain high in the years ahead. Investment in the petroleum sector has spillover effects on the mainland economy, initially on the engineering industry and the construction sector. Looking forward, the scale of petroleum investment and its spillover effects are highly uncertain. The last time petroleum investment showed a sharp increase, in 1997/1998, growth was substantially stronger than had been assumed. An upturn occurred in the Norwegian economy as a whole at the same time. The unexpected increase in petroleum investment contributed to an economic upturn that was substantially stronger than projected. If oil prices rise further or remain at the current high level for a long period, petroleum investment may again amplify the cyclical upturn to a greater extent than projected. Let me now return to the framework for economic policy in Norway.

Current inflation is low, but our recent history shows that without a nominal anchor inflation was high and variable and that we did not achieve higher growth in exchange for inflation. An economic policy that fuels inflation does not generate higher economic growth. On the contrary, it paves the way for subsequent recession and unemployment. High and variable inflation usually accompanies instability in output and employment. But inflation should not be too low over time either. This is partly because the structure of the economy evolves over time. Demand for labour with different qualifications changes. Restructuring requires changes in real wages and relative wages. Nominal wages do not readily fall. With some measure of inflation, real wages and relative wages can be changed without reducing nominal wages. Some degree of inflation oils the economic machinery. In periods, it will be appropriate to stimulate the economy with low, or even negative, real interest rates. If inflation becomes entrenched at a very low level, the interest rate will be less effective as an instrument because it cannot be set below zero. If the economy is again exposed to unexpected negative disturbances, we will have little scope for manoeuvre. The most important contribution monetary policy can make to sound economic developments in the long term is low and stable inflation. The inflation target provides an anchor for economic agents’ expectations concerning future inflation. We have a very open economy with free capital movements. Stable inflation expectations also contribute to more stable krone exchange rate expectations.