2002 2004 sources : trcis, ministry of finance and norges bank the fall in the value of the krone over the past year has strengthened the norwegian business sector. the business sector is, however, still feeling the effects of a sharp rise in labour costs over a period of several years. relative labour costs measured in a common currency are in line with the level prevailing in 1990, but approximately 10 per cent higher than in the mid - 1990s. the internationally exposed sector has been scaled back. those companies that are currently operating may be in a better position to bear the high wage level. nevertheless, costs may limit activity and employment. growth in the norwegian economy picked up again through the summer of 2003. in the period ahead, solid growth in household income, subdued consumer price inflation and low interest rates will provide the conditions for high growth in private consumption. there is optimism in the building and construction sector. high petroleum investment is also supporting activity while mainland business investment has been low for a long period. the number of persons employed began to increase in the summer of 2003 and unemployment stabilised. an economic turnaround has occurred, with a soft landing after the long period of high cost inflation in norway and a low level of activity in other countries. but inflation is too low. as mentioned, there are three main factors that have contributed to this. first, the global downturn had considerable implications for the impact of interest - rate setting in norway. a strong krone contributed to the decline in inflation. the krone has now returned to its previous level so that the effect will be reversed. second, low inflation in other countries and rapid changes in the international division of labour have resulted in a fall in prices for imported goods and services, even when measured in terms of what norwegian importers pay in foreign currency. third, intensified domestic competition also appears to have exerted downward pressure on prices. as a result of both changes in the international division of labour and increased domestic competition, there is idle labour and available real capital in norway. we cannot rule out that adjustments will be made over a period of time and that these adjustments will encompass a large portion of the domestic economy. thus, it is possible that the level of output that is consistent with stable inflation will increase. inflation will remain low in 2004. however, the easing of monetary policy will gradually push up inflation. as mentioned, it may take some time before interest rates in other countries are increased to a considerable extent. we have seen that in periods

monetary policy in retrospect, the decision - making basis that existed at the time must be taken into account. the decision - making basis may change as a result of revisions to data or new information about economic developments, or our interpretation of the information available may simply change. even though it is difficult to find a simple and precise performance measure, some general evaluation criteria may be identified. if the krone exchange rate is stable at approximately the initial range, as defined in the exchange rate regulation, and inflation is approximately on a par with the level aimed at by the ecb, it may be said that monetary policy, on the basis of the objective established, has been successful. with a weak exchange rate and high inflation, it is natural to raise critical questions about monetary policy. it may then have been too expansionary. similarly, with a strong exchange rate and with inflation close to zero or deflation, monetary policy has probably been too tight. if price and cost inflation is on a par with the level aimed at by the ecb, one of the fundamental preconditions for exchange rate stability has been satisfied. the exchange rate may nevertheless be regarded as " too strong " or " too weak " in relation to the initial range. this may be because conditions in the real economy imply a real appreciation or real depreciation of the krone. the reason for these exchange rate changes may be a deterioration or improvement in the cost competitiveness of the norwegian business sector. for example, a greater use of petroleum revenues in the government budget may mean that the internationally exposed sector has to be scaled back in order to create room for higher domestic consumption. the equilibrium level for the krone exchange rate may therefore change. in this situation, norges bank should have carefully evaluated the reasons for exchange rate movements. if there is reason to believe that the exchange rate will remain strong or weak for a prolonged period, norges bank will have to decide whether to notify the government authorities that measures other than those available to the central bank may be necessary. we can imagine situations in which the interest rate had to be kept at a high level, leading to a deflationary recession, in order to allow the krone exchange rate to remain close to its initial range for a period. however, this situation would hardly be stable. as long as economic fundamentals do not support the krone exchange rate at the initial range, it is highly unlikely that this would persist. if monetary policy has contributed to a