svein gjedrem : the outlook for the norwegian economy address by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the bergen chamber of commerce and industry, bergen, 11 april 2007. 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 15 march and in monetary policy report 1 / 07. * * * introduction monetary policy in norway is oriented towards low and stable inflation with annual consumer price inflation of close to 2. 5 per cent over time. low and stable inflation provides enterprises and households with an anchor for inflation expectations. given that there is confidence in the nominal anchor, monetary policy shall also contribute to stable developments in the real economy. norges bank therefore operates a flexible inflation targeting regime. this means that weight is given to both variability in inflation and variability in output and employment in interest - rate setting. flexible inflation targeting builds a bridge between the long - term objective of monetary policy, which is to keep inflation on target and provide an anchor for inflation expectations, and the more short - term objective of stability in the real economy. low inflation and solid growth in the norwegian economy inflation in norway decelerated markedly from the late - 1980s to the mid - 1990s and has since been low and stable, and fairly close to, but somewhat lower than the target of 2. 5 per cent, with considerably lower variability than earlier. consumer prices show monthly variations. after a period of very low inflation in 2004, inflation was on the rise through 2005. thereafter, domestic inflation showed an unexpected drop in 2006 and is still low. so far in 2007, it has edged up, but is still fairly low. lower electricity prices have contributed to a fall in total cpi inflation in recent months. underlying inflation, i. e. inflation adjusted for tax changes and excluding energy products, was fairly stable for a long period and has been estimated at between 1 and 1½ per cent. the latest inflation figure indicates that underlying inflation is now in the upper end of the interval. the norwegian economy is booming after a strong upturn since summer 2003. the upturn followed a period of slow growth from 1998 and a mild slowdown in 2002 and into 2003. growth has been stronger than in the cyclical upturn in the mid - 1990s. the growth period of recent years has been the longest unbroken growth period recorded in quarterly

. but we are also able to call on our network of regional agents, who talk each month to a wide variety of companies, including, i know, some of you. it is clear from the agents'reports that the confidence of many of those they speak to has been hit in the aftermath of the terrorist attacks. labour hiring and discretionary spending decisions may be deferred for a while, whilst the situation becomes clearer. and investment could be reduced if businesses look for a higher return to cover any increased risk. what does all of this mean for inflation? so - called'upstream'prices - including raw material costs and factory gate prices - remain very subdued. some business costs, such as insurance, will rise, but that should be at least partially offset by the sharp fall in oil prices. rpix inflation rose briefly above target in august, but fell back to 2. 3 % in september. we are just starting to put our next formal inflation forecast together, and you will be able to see the results of that exercise in the november inflation report. at this point, i know you would wish a crisp conclusion and some indication of where i think rates should move in the future. some of you may even think you have detected clues in what i have said as to where i think rates should go. if you have, though, that would be an over - interpretation. there are, i think, clear downside risks. the world economy may slow further if adverse confidence effects persist. spending which is currently delayed may be cancelled. and the labour market may begin turning more decisively in the uk. but for the moment these risks need to be weighed against the continued strength of domestic demand. of course, if we are to meet our inflation target, a strong domestic economy will be needed to offset the weakening influence of overseas markets. we have cut interest rates by 150 basis points since the start of the year in part to achieve this, and the full effect of these reductions have still to come through. all this will make for an interesting november round where, as i indicated earlier, we will look carefully at all the data, making our decision firmly in the light of the inflation target we have been set. maintaining financial stability having discussed monetary policy, i now want to turn to the other key role of the bank of england - that of maintaining stability in the overall financial system. this does not, of course, mean that we supervise individual banks, building societies and investment firms. since