Towards the end of the upturn, the economy was facing labour shortages, accelerating wage growth as well as a sharp increase in household consumption and debt. Interest rates in Norway were kept high and the interest rate differential gradually widened. Cyclical developments in Norway have also differed in other ways from developments in other countries. The expansionary period in Norway led to strong wage growth from 1998 to 2002. The upturn in the global economy at the end of the 1990s was largely driven by business investment, and wage growth was moderate. On the other hand, wage growth in the Norwegian business sector from 1998 to 2002 was higher than the level that over time is consistent with the inflation target and with normal productivity growth. Consumer price inflation in Norway declined sharply through 2003. In 2003, wage growth was considerably lower than in the previous five years. This provided a sounder basis for substantial reductions in Norwegian interest rates, resulting in a narrowing of the interest rate differential between Norway and other countries. The reduction has contributed to a weakening of the krone since December 2002. Thus, the real krone exchange rate has also depreciated and business sector competitiveness has improved. However, the business sector is still burdened with the loss in competitiveness that is due to high wage increases. The exposed sector has been scaled back. Those companies that are still operating may be in a better position to sustain the high wage level. Nevertheless, costs may hamper activity and employment growth.

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 exchange rate risk. Instruments that reduce the risks associated with a floating krone are increasingly being used, also in Norway. Hedging against fluctuations in the krone involves costs for businesses. A krone that is stable - but too strong - also entails costs to the economy in the form of low activity. Similarly, a krone that is stable but weak - is a source of high inflation. Petroleum revenues generally provide substantial, but uneven currency inflows into Norway. The currency flows might have resulted in a strong krone and large variations in the exchange rate. This tendency is countered, however, when the annual use of petroleum revenues over the central government budget is predictable and independent of annual revenue flows, and the remaining revenues are saved and invested abroad. The capital outflows through the Government Petroleum Fund contribute to both curbing the appreciation of the krone and maintaining its stability. Higher oil prices have resulted in higher current account surpluses. In isolation, this contributes to strengthening the krone. However, higher surpluses are being offset by higher long-term capital outflows through the Government Petroleum Fund. In addition, the oil companies primarily invest their cash surplus abroad. Foreign trade figures indicate that mainland imports have increased sharply in recent months. This increases demand for foreign currency.