at times have a tendency to underestimate the fund ’ s function as a stabilisation mechanism. the capital outflows through the fund contribute to both curbing the appreciation of the krone and maintaining its stability. since the summer of 2004, the krone exchange rate has appreciated by about 5 per cent, as measured by the trade - weighted exchange rate index ( twi ). the chart shows the krone exchange rate and oil spot prices from 1999. the chart indicates that there is no clear relationship between the nominal exchange rate and oil spot prices over time. an appreciation of the krone has accompanied higher oil prices in some periods and lower oil prices in others. the correlation between oil prices and the nominal exchange rate has therefore varied over time. however, since the introduction of the inflation target in march 2001, the average correlation has been about zero. this is a remarkable result and may indicate that the petroleum fund has shielded the nominal exchange rate from movements in oil prices. therefore, there is cause for some optimism regarding the possibilities of isolating the mainland economy from variable oil prices in the short and medium run. in the long run, however, we cannot insulate the real exchange rate from developments in the petroleum sector or the use of petroleum revenues. i will return to this later. an increase in oil prices may nevertheless generate expectations of increased petroleum revenue spending ahead, particularly if high oil prices are assumed to persist. such expectations may exert appreciation pressures on the krone. the chart shows that future oil prices 6 - 7 years ahead have increased more than spot prices since january 2004. this sharp rise may help to explain some of the appreciation over the past year. in addition, there may be expectations that developments will be more favourable in the norwegian stock market than in foreign markets when oil prices rise. this may also have contributed to strengthening the krone. however, when estimating the future value of the petroleum fund, the expected decline in the level of production on the norwegian continental shelf should also be taken into account. in addition, there has been a tendency lately to overestimate production when looking a few years ahead. investment in the petroleum sector is an important source of business cycle fluctuations in norway. investment rose sharply in the 1970s and 1980s and reached a peak in 1998. mainly as a result of persistently high oil prices and expectations that oil prices will remain high, investment in the norwegian petroleum sector may again reach record levels this year. norges bank ’ s regional network currently

s assesses the outlook for price inflation and sets interest rates. since 1997, labour costs have increased annually by between 5 and 7 per cent. in spite of this, consumer price inflation has been close to 2½ per cent over the past few years. the krone exchange rate has appreciated as a result of a wider interest rate differential between norway and other countries. combined with low growth abroad and increased trade with low - cost countries such as china, this led to a slower rise in import prices. in norway, voluntary export restraints on clothing have been removed and tariffs on clothing have been reduced considerably. in the eu and the us, a similar tendency has not been seen to the same extent. this may explain why prices for clothing have fallen in norway relative to the eu and the us. however, there is still a long way to go before restrictions on clothing imports to norway are entirely dismantled. for example, there is a duty today on imported children ’ s clothing and on shirts, suits, jackets and trousers for men and boys. as the world economy recovers, import price inflation will edge up. a rise in labour costs of more than 5 per cent will then only be consistent with the inflation target if the krone continues to appreciate. in the long run, wages must be compatible with the value added that is generated by workers, i. e. labour productivity. over time, the increase in real wages is therefore determined by developments in labour productivity. in norway, productivity growth has averaged 1½ - 2 per cent over the last 20 years. if this continues to be the case, an increase in nominal labour costs of around 4 - 4½ per cent in the long term will be consistent with the inflation target. there is an important interaction between monetary policy and fiscal policy. according to the guidelines for fiscal policy, petroleum revenues are to be phased in approximately in pace with the expected real return on the government petroleum fund. this guideline implies that fiscal policy will contribute to stimulating aggregate demand in the norwegian economy every year for many years ahead. the guideline also implies that the use of petroleum revenues will increase as long as the petroleum fund is expanding. variations in oil prices are accompanied by considerable fluctuations in government petroleum revenues from one year to the next. it is important to prevent these fluctuations from spilling over to the mainland economy. public expenditure and taxes that vary in relation to oil prices would result in an unstable economic environment. financial markets would be marked by uncertainty and turbulence, with an increase in