well capitalised and well positioned to cope with losses and market stress. households and firms appear to have ample access to credit. we are closely monitoring developments and we are always prepared to take the measures required to safeguard financial stability if needed. let me say a little more about the economic outlook and our assessments. chart 4 persistently high inflation among trading partners inflation is also high among our trading partners, although it has recently moderated a bit. labour markets are tight. with the lifting of pandemic - related restrictions in china and lower energy prices, activity among trading partners will likely be higher than we had anticipated earlier. high inflation has prompted central banks in many countries to raise policy rates to the highest levels since the 2008 financial crisis. over the past year, foreign interest rates have risen more than norwegian rates. combined with the turbulence in financial markets, this has probably contributed to the depreciation of the krone. the krone is now considerably weaker than we envisaged in december. a weaker krone means an increase in prices for imported goods and services in krone terms. this will contribute to sustaining inflation in norway. figure 5. high employment activity in the norwegian economy has been higher than expected. employment is high and unemployment is low. at the same time, we have seen an increase in labour force participation, which is a welcome development. growth in the economy will likely be weaker ahead, but the slowdown appears to be less pronounced than projected in december. the enterprises in our regional network report slightly better prospects than before christmas, but there are wide variations across industries. in the secondary housing market, prices have risen somewhat in recent months, but the number of homes for sale is quite high. new home sales are very low. we expect a modest decline in house prices ahead as a result of higher interest rates. chart 6 wage growth on the rise wage growth is rising and reached the highest level seen in over a decade last year, turning out higher than we had expected. this can be ascribed in large part to a tight labour market and improved profitability in some business sectors. the social partners expect wage growth to rise further this year, and expectations have increased in recent months. wage growth is projected to be around 5 percent this year, 2 / 3 bis - central bankers'speeches which is higher than we projected in december. while wage growth did not keep pace with price growth last year, we expect wage inflation to be slightly higher than price inflation this year. higher wage growth

rates will normally lead to a depreciation of the krone. imported goods will then become more expensive and inflation will accelerate. expectations play a key role in price and wage formation, and they are influenced by the interest rate. expectations concerning future inflation and economic stability have considerable impact, not least in the foreign exchange market. more stable inflation current inflation is low, but our recent history shows that without a nominal anchor inflation becomes high and variable with substantial effects on output and employment. in the 1970s and 1980s, average annual inflation in norway was over eight per cent. the fixed exchange rate regime, which was introduced in 1986, reinstated monetary policy as an instrument of economic policy in norway and laid the foundation for lower inflation and more stable economic developments. like other small, open commodity economies, norway also experienced that it was not possible to maintain a stable exchange rate as a nominal anchor. inflation targeting was therefore introduced in 2001. high and variable inflation usually accompanies instability in output and employment. but inflation should not be too low over time either. this is partly because the structure of the economy evolves over time. demand for labour with different qualifications changes. restructuring requires changes in real wages and relative wages. nominal wages do not readily fall. with some measure of inflation, real wages and relative wages can be changed without reducing nominal wages. some degree of inflation will oil the economic machinery. in periods, it will be appropriate to stimulate the economy with low, or even negative, real interest rates. if inflation becomes entrenched at a very low level, the interest rate will be less effective as an instrument because it cannot be set below zero. if the economy is again exposed to unexpected negative disturbances, we will have little scope for manoeuvre. stability in output and employment in the long term, output and employment are determined by the supply of labour, capital and technology and by the ability to adapt. monetary policy can contribute to smoothing fluctuations in output and employment. norges bank weighs stable inflation against stable output and employment. the output gap is a measure of the difference between the actual level of output and potential output. potential output, which is the level of output that is consistent with inflation over time, is not directly observable and must be estimated. one simple method is to assume that potential output over time grows at trend because the labour force expands and productivity rises. developments in the output gap provide a basis for assessing cyclical developments and can thus also shed light on domestic price and cost