jarle bergo : monetary policy and the cyclical situation speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), at a meeting with local authorities and the business community, kapp, 23 november 2005. please note that 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 2 november, inflation report 3 / 05 and on previous speeches. charts in pdf - format can be found on the website of the norges bank. * * * the economic situation the cyclical upturn in the norwegian economy continues. overall capacity utilisation in the economy has increased. after a period of very low consumer price inflation, there are prospects that inflation will again rise at a faster pace. interest - rate setting since this spring has been oriented towards a gradual increase in the interest rate – in small, not too frequent steps – towards a more normal level. on the basis of the analysis in inflation report 3 / 05, this strategy still appears to provide a reasonable balance between the objectives of monetary policy. the reduction in norges bank ’ s key rate through 2003 and into 2004 resulted in low interest rates. at the beginning of the recovery, falling interest rates and expectations of low real interest rates ahead fuelled private consumption. a weaker krone exchange rate and the international recovery stimulated traditional merchandise exports. moreover, fixed investment in the petroleum sector has expanded sharply, which has led to rising demand for goods and services supplied by mainland enterprises. mainland fixed investment also picked up after a period. since the recovery started, quarter - on - quarter mainland gdp growth has averaged 3½ per cent annualised. growth has been steady. the economic upturn has continued this year. on balance, demand is expected to remain relatively high in the near term. expectations of continued low albeit rising interest rates and real income growth should support growth in household consumption and fixed investment ahead. brisk investment growth in the petroleum industry, moderate wage growth and high profitability in many enterprises suggest further investment growth in the mainland enterprise sector. the economic upturn is now broadly based. in manufacturing, the order backlog is at a record - high level, which implies continued production growth over the next quarters. statistics norway ’ s business tendency survey for manufacturing points in the same direction. activity has remained buoyant in the construction sector for a long period. new orders in this

are events that were difficult to capture in advance in norges bank ’ s projections. the origins of such disturbances may often lie outside norway. the assessment of our near future and our current situation may change as time passes and as more accurate statistics become available. the functioning of the economy could also change. monetary policy is oriented towards stabilising inflation and output growth. if unexpected disturbances arise and new information concerning the functioning of the economy emerges, the executive board must assess whether a different interest rate path may be more appropriate in order to achieve our objectives. the interest rate outlook may therefore change over time. the fan charts illustrate the uncertainty that can be expected based on recent history. the executive board discussed the main content of inflation report 3 / 05 before the report was published. on the basis of the analysis and the executive board ’ s discussion, the board assessed the consequences for the future interest rate path and approved the monetary policy strategy for the period to the next inflation report in march. the interest rate path presented in the inflation report will, in the assessment of the executive board, provide a reasonable balance between the objective of bringing inflation up to target and the objective of stabilising developments in output and employment, conditional on the information norges bank had at the time the report was published. the interest rate may gradually – in small, not too frequent steps – be brought back towards a more normal level. the objective of bringing inflation back to target and anchoring inflation expectations nevertheless implies that monetary policy remains expansionary. in the assessment of the executive board, the sight deposit rate should lie in the interval 2 - 3 per cent in the period to the publication of the next inflation report in march 2006, conditional on economic developments that are broadly in line with the projections. in the press release following the executive board ’ s meeting on 2 november, the following factors of uncertainty were highlighted : • stronger trade shifts and increased labour market competition may result in lower price and wage inflation and weaker pressures in the economy. in isolation, this would imply less frequent interest rate changes. • we have little experience of such low interest rates over a long period. there is a risk that an interest rate that is kept low for a longer period may lead to expectations of a persistently low interest rate. this might result in a higher - than - projected rise in output and inflation and would in isolation suggest a faster interest rate increase. • developments in the global economy are uncertain. our projections are based on favourable growth prospects in other countries