a real interest rate that is lower than the neutral rate will stimulate activity even after the effects of the interest rate fall itself have been exhausted. this was pointed out by the swedish economist knut wicksell in 19072 : "... the upward movement of prices, whether great or small in the first instance, can never cease so long as the rate of interest is kept lower than its normal rate ". calculations seem to indicate that the neutral real interest rate for norway is between 2½ and 3½ per cent and it has probably fallen somewhat in recent years. monetary policy is functioning it takes time for an interest rate reduction to have an impact on inflation. we are now seeing the effects of monetary policy decisions some of which were taken two years ago. the interest rate has affected inflation via the krone exchange rate and via demand for goods and services. in particular, the rise in prices for domestically produced goods and services has picked up. in addition, the reduction in the interest rate has probably contributed to holding up expectations of future inflation even when inflation is low. knut wicksell ( 1907 ) : “ the influence of the rate of interest on prices ”, economic journal, xvii ( 1907 ), pages 213 - 220. norges bank ’ s key rate is an overnight rate. the interest rate on deposits and loans with longer maturities will reflect expectations as to future interest rate decisions. as the key rate was gradually reduced, expectations also fell, and banks reduced their lending rates. monetary policy has had a greater impact because market participants expected the low interest rate to persist over a period. the first signs of the effects of the interest rate cuts appeared in the foreign exchange market. the interest rate differential against other countries narrowed. it became more attractive to borrow and less profitable to invest in the norwegian krone. the movement in the krone exchange rate was reversed and it depreciated through 2003 and into 2004. however, the impact on the krone exchange rate has been considerably dampened because external interest rates have remained low. high prices for oil and gas and other export goods also contributed to an appreciation of the krone last year. the depreciation of the krone in 2003 contributed to restraining the fall in prices for imported goods. the effect occurred gradually. companies and importers may have preferred to observe changes in the exchange rate over time before changing their selling prices. after several expensive wage settlements and a short period of a strong krone had weakened profitability in

the norwegian business sector, the depreciation of the krone contributed to curbing the decline in activity and employment. there is nevertheless uncertainty as to the magnitude of the impact of short - term exchange rate fluctuations because companies engage in currency hedging. there are different ways to hedge against currency fluctuations. some enterprises buy intermediate goods in the same currency in which they sell their products. other companies raise a loan in the same currency as that of the company ’ s assets. in addition, companies can hedge against currency swings in the forward exchange market and options market. the large volume of international trade in currency derivatives, which is dominated by banks reduces, premiums and costs for other business sectors and thereby promote cross - border trade in goods and services. it is not a good idea to throw a spanner into the works. the impact on household consumption and housing investment has been substantial. business investment is now picking up. in norway, household debt is higher than household deposits. the decline in interest rates has thereby freed up funds. households reacted relatively rapidly, and growth in consumption picked up. the fall in interest rates pushed up house prices. turnover in the housing market has been high. higher housing wealth provides increased borrowing opportunities and thereby also boosts demand for consumer durables. household debt has risen by around 11 per cent over the past year. high resale home prices have made it more profitable to build new homes, and residential construction is rising. the fall in interest rates has also contributed to sustaining the market value of office premises and commercial property even with a high vacancy rate. with the prospect of higher occupancy rates, prices are now rising. owing to higher productivity and a drop in sickness absence, it may have taken time for the effects to become visible in the labour market. however, higher demand for labour and falling unemployment is gradually leading to a tighter labour market. high interest rates in 2002 and fiscal discipline contributed to a deceleration in wage growth to a more sustainable level. higher demand for companies ’ goods provides scope for increasing prices. experience shows that inflation is directly influenced by the level of capacity utilisation in the norwegian economy. some of the rise in prices for domestically produced goods and services can be attributed to higher margins in the business sector. if there is confidence in monetary policy, economic agents will expect inflation to be close to target over time. this will provide a basis for company budgets. this will then contribute to stabilising inflation. many companies change their prices