Although the phasing-in of petroleum revenues is a gradual process, the contest for labour resources will intensify. As a result, monetary policy is likely to remain fairly tight in the years ahead. A high interest rate level may, as we are now experiencing, result in a strong krone in periods . This may accelerate the scaling back of manufacturing industry. However, in the long run monetary policy cannot influence overall employment or its distribution across industries. A lower interest rate would have resulted in higher price and cost inflation, which would also have weakened profitability in the manufacturing sector. The end result would have been the same for employment and production, but in addition we would have had high inflation. Even if manufacturing employment and production show a decline, the situation for Norwegian enterprises will not necessarily be negative. Some enterprises could be at the forefront of technological developments and increase efficiency in pace with the relatively sharp rise in costs in  1  The figures are based on the national accounts. We have defined private service industries as wholesale and retail trade, hotels and restaurants, other transport industries, financial intermediation, commercial services and part of other social and personal services. 4  BIS Review 65/2002  Norway. In recent years, we have also seen that many enterprises have moved large portions of their production abroad, particularly the most labour-intensive production. Norwegian manufacturing companies could still be profitable. Export industries generate foreign-exchange earnings to finance imports of goods and services.

However, the moderate growth in the M3 monetary aggregate indicates that this situation has not changed since the last monetary policy assessment. Thus, the monetary analysis shows that we can continue pursuing our expansionary monetary policy for the time being, without incurring additional risks. Since the first quarter of 2003, the year-on-year growth rate for mortgage loans has exceeded 5%. Mortgage loans to households slowed slightly at the end of 2004, but since then their rate of growth has accelerated to a level higher than that recorded in recent years. Mortgage loans to companies, which had declined over the past five years, have also risen again since the beginning of the year. Prices continue to increase in the real estate market, a development to which, in our view, the low mortgage rates have contributed. Well aware that our monetary policy is still expansionary, we are keeping a close eye on developments in the real estate sector. In view of the above-mentioned developments, we have decided to leave the target range for the three-month Libor rate unchanged at 0.25-1.25%. What were the most important factors that led to this decision? There were three of them. First of all, we needed to downgrade our expectations with respect to the development of the economy. However, there are no signs of any cyclical downturn and the economy continues to recover, even if this recovery is somewhat delayed and muted. Second, the lacklustre economic activity is being accompanied by an improvement in the medium-term outlook for inflation.