drivers, pre - school teachers, supervisors, engineers, carpenters, architects, auditors, accountants, it personnel and health workers. it has probably not been since the 1970s that we find such widespread reports of purely physical production constraints, for example now in the form of shortages of rigs and other equipment in the petroleum industry or shortages of plank, concrete and insulation in the construction industry. when we reduced the interest rate in 2003, demand and output rapidly picked up. however, it took a long time for employment to rise and the next phase from a pick - up in employment to a fall in unemployment was also long. but now the upturn has entered into a mature phase. as illustrated in the chart, capacity utilisation was higher than its normal level in 2006. nevertheless, wage growth has thus far been moderate and inflation is clearly lower than the target of 2½ per cent. the decline in import prices, increased labour flows and higher productivity came into clear evidence when wage and price inflation fell markedly 3 - 4 years ago. a period of low real interest rates would nevertheless have been appropriate in order to realise the added growth potential. however, after several years of strong growth, resources are now in short supply. with the substantial number of businesses now facing capacity constraints, we can expect inflation to pick up. it is uncertain whether inflation will then rise quickly or only gradually near target. strong export growth, high oil investment and after a period higher growth in general government demand have contributed to the upswing in production and employment. but the low level of interest rates has also been a prominent driving force. this reflects the dynamics inherent in interest - rate setting. low interest rates have stimulated demand and production and should lead to higher inflation, to which we are now reacting by raising interest rates. under inflation targeting, it is important to be mindful of the effects of higher interest rates on the krone exchange rate when inflation is low. interest rate developments in other countries are thus of importance to interest rates in norway. unemployment has declined sharply in recent quarters. the pace of decline and the level of unemployment are reminiscent of two earlier cyclical peaks, one in the mid - 1980s and the one that began at the end of the 1990s and continued into the present decade. both booms culminated in sharply accelerating cost and wage inflation. some of the driving forces that have boosted the growth potential of the norwegian economy and restrained inflation may diminish. prices for imported goods are no longer decelerating at

svein gjedrem : economic perspectives address by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the meeting of the supervisory council of norges bank, oslo, 15 february 2007. please note that the text below may differ slightly from the actual presentation. * * * introduction the poet rolf jacobsen would have been 100 years old this year. he was particularly interested in geography. in an interview with telemark arbeiderblad in 1971, he stated that the bible was a work of substantial importance, but that the same could be said about the comprehensive guide to public transport in norway. 14 in one of his geography poems, he writes : “ when the sun is shining on china the stars are twinkling here. and the reverse. asia is vast. half the earth ’ s land mass [... ] 15 yes, asia is vast. the rapid expansion in china and other asian countries is of growing importance to norway. these countries are a major source of cheap consumer goods and services and demand for our raw materials. ole karlsen ( editor ) ( 1993 ) : frøkorn av ild ( seeds of fire ). om rolf jacobsens forfatterskap, landslaget for norskundervisning, cappelen fakta. source : from the poem ” nar solen skinner pa kinesere ” ( when the sun is shining on china ) in rolf jacobsen ’ s collection of poems ” nattapent ”. gyldendal norsk forlag a / s 1985. interest rates, inflation and the business cycle the norwegian economy is now booming following the pronounced upswing since summer 2003. the upturn followed a period of slower growth as from 1998 and a mild recession in 2002 and into 2003. even though there have been cyclical changes, growth has been very high over the past 15 years. norway is one of the nations that has gained most from trade liberalisation and increased cross - border flows of capital, technology and labour. norway has experienced the benefits of shifts in the division of labour across countries and regions. first, norway ’ s terms of trade have improved markedly. we can buy one and a half to two times the volume of imports for the price paid for our exports than was the case only 5 - 6 years ago. prices for oil and gas, shipping, fish, industrial commodities and engineering products have increased considerably. moreover, norwegian import