exchange rate and in exchange rate expectations over time is dependent on stable inflation expectations, which in turn depend on low and stable inflation. evidence indicates that an inflation target provides a sound anchor for exchange rate expectations. however, these expectations will also depend on fundamental conditions such as developments in government expenditure and revenues, productivity growth, oil prices and the terms of trade, excluding oil. deterioration in competitiveness following several years of high wage growth high wage growth over several years has eroded the competitiveness of the norwegian business sector. last year, the effects of high wage growth were amplified by the changes in the krone exchange rate. although the nominal krone exchange rate has depreciated this year, the competitiveness of norwegian industries is still rather weak. the krone has now reverted to around the level prevailing in the mid - 1990s, while labour costs in manufacturing rose by 13 per cent5 more than among our trading partners in the same period. the developments in the krone exchange rate proved to be reversible, but the loss of competitiveness and jobs caused by relatively high wage growth in norway is difficult to recoup. a precondition for a considerable improvement in competitiveness is probably that real wage growth is lower than productivity growth in the business sector for a period. experience shows that this occurs in periods when there is excess capacity in the economy. this means that changes in competitiveness over time q. farooq akram ( 2003 ) : “ reelle likevektsvalutakurser for norge ” ( real equilibrium exchange rates for norway ) in norges bank ’ s occasional papers, no. 31 ( norwegian only ). wage figures for trading partners have been revised since the publication of “ report on monetary policy in 2003 – the first eight months ”. depend on real economic factors and on aspects of wage formation and cannot be controlled by monetary policy. however, with flexible inflation targeting, the social partners can normally expect low wage growth to have a greater impact on competitiveness because it can result in a weaker krone. in norges bank ’ s assessment, the outlook for the internationally exposed sector is brighter today than a year ago because the rise in costs has slowed markedly. as mentioned earlier, the decrease in wage growth has been of great importance in enabling us to reduce the key rate towards an international level. we expect inflation to pick up in the first half of 2004. output and employment will probably grow somewhat more than trend. again, thank you for giving me

rule, and in norway we have avoided prolonged periods of high unemployment. the reform of the economic policy framework deserves a large part of the credit, but we have also benefited from global developments. globalisation, especially china ’ s expanded role in world trade in the early 2000s, ushered in a period of low prices for globally traded goods. in many countries, the concern was that inflation was too low, not too high. and some were perhaps misled into believing that inflation was a thing of the past. the return of inflation but it turns out that inflation was not dead ( chart 5 ). two events reawaken inflation. chart 5 the return of inflation consumer prices. four - quarter change. percent inflation inflation target sources : statistics norway and norges bank 6. see richard clarida og daniel waldman ( 2008 ). “ is bad news about inflation good news for the exchange rate? and, if so, can that tell us anything about the conduct of monetary policy? ” in : john campbell ( ed. ) asset prices and monetary policy. national bureau of economic research books, university of chicago press. 7. the mechanism can be described based on the aukrust model. a weaker krone increases the wage capacity of the manufacturing sector, which sets the wage norm. increased wage capacity can lead to higher negotiated wage increases. since wage growth in manufacturing sets the standard for wage growth in the rest of the economy, wage growth in sheltered sectors will also increase. these sectors can more readily pass on higher costs to prices, driving up overall inflation. higher inflation can, in turn, lead to a further krone depreciation, if the foreign exchange market does not have confidence in monetary policy. norges bank economic perspectives 2023 first, the world is hit by a pandemic. we know the story : much of the economy is locked down, large - scale government support is provided, and central banks pursue a highly expansionary monetary policy. in may 2020, norges bank reduces its policy rate to zero. global supply chain disruptions lead to a rise in prices for a broad range of goods. when the pandemic restrictions are lifted, economic activity quickly rebounds in both norway and other countries. the unusually high level of saving during the pandemic gives an additional impetus to demand. and two years after the onset of the pandemic, the norwegian economy is operating above potential. on 24 february 2022, russia invades ukraine. energy and commodity prices so