than normal. monetary policy should not counteract this. higher productivity growth leads, for example, to lower inflation as well as to an increase in potential output in the economy. a sustained increase in competition in domestic markets will reduce prices and profit margins. at the same time, production will increase. in efficient markets, an increase in supply will normally generate higher demand without the need for a monetary policy response. the effects of globalisation are more intricate. increased trade contributes to cheaper imported goods and increased potential consumption, but not necessarily to increased potential output. there probably have been some disturbances on the supply - side that may be associated with a permanent increase in potential output in norway. our estimates of the potential output level have increased in pace with the emergence of new information. our best guess is nevertheless that the output gap is now positive and widening. low inflation combined with high growth in output and employment is therefore a challenge to monetary policy. even though economic growth has been strong over the past 15 years, business cycles have fluctuated. a pronounced upturn in the years from 1993 to 1998 was followed by a period of more moderate growth and a mild recession in 2002 and into 2003. since summer 2003, there has again been a clear upturn in the norwegian economy. wage developments reflect and influence business cycles. strong employment growth in the 1990s resulted in a rise in labour costs, which in turn had a dampening impact on growth. moderate wage growth in recent years has been accompanied by a strong cyclical upturn. so far, the upturn has been marked by strong growth in output, with an ample supply of labour and unusually low inflation. for a longer period employment showed a smaller rise than in previous cyclical upturns, partly reflecting the decline in sickness absence since summer 2004 and solid growth in productivity. employment showed a turnaround last autumn and the number of persons employed is now increasing sharply. unemployment is falling rapidly. the threat of relocation of jobs to other countries, increased inward labour migration and increased imports of goods and services may contribute to somewhat more moderate wage growth during this upturn. it is also possible that the experience of the period 1998 - 2002, with high wage growth and sharp fluctuations in the krone exchange rate and interest rates, is still marking wage settlements. at the same time, the situation with an ample labour supply may also be reversing. sickness absence is now on the increase, and the number of persons on disability benefit is still rising steadily. other countries still provide

the rise in prices we have recently observed could affect inflation in the period ahead through compensation for earlier inflation, the pass through of costs to selling prices and through expectations of future price inflation. by using various measures of underlying inflation, we seek to capture the portion of the rise in prices that may influence future inflation. it is always difficult in real time to determine which price movements will persist and which will only have a short - term effect on the cpi. an assessment of underlying inflationary pressures should probably be based on several different indicators and developments in these should be followed up by discussion and interpretation of the underlying causes. allow me to conclude. developments over the past 40 years have illustrated that the most important contribution monetary policy can make to sound economic developments in the long term is low and stable inflation. this provides the economy with a nominal anchor. in its conduct of monetary policy, norges bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. flexible inflation targeting builds a bridge between the long - term objective of monetary policy, which is to keep inflation this is discussed in “ measures of core inflation ” in bank of england ’ s inflation report of february 2006. see www. bankofengland. co. uk. on target and provide an anchor for inflation expectations, and the more short - term objective of stability in the real economy. in some situations, it may be desirable to bring inflation rapidly back to target. in other situations, it may be desirable to apply a longer horizon. in this context, it may be appropriate to differentiate between supply - side and demand - side disturbances. the horizon must also been seen in the light of developments in house prices and debt. however, for monetary policy to function as intended, it is important that there is confidence in the nominal anchor. thank you for your attention.