from workers to employers. in a number of european countries, wage growth is also being influenced by increased labour inflows from the eu accession states. as scandinavian consumers, we are benefiting from falling prices for many imported goods. lower import prices are also ascribable to a shift in our imports towards a higher share of imports from lowcost countries. the change in clothing prices in norway may serve as an illustration. prices rose by around 3 per cent annually for a long period, but since 1995 they have been falling by about 6 per cent annually. this kink point coincides with the dismantling of the restrictions on textile trade and with a period of rationalisation in retail trade in norway. the rapid growth of production in china, india and other newly integrated economies has led to a substantial rise in demand for oil and other raw materials. at the same time, increased trade has engendered higher demand for shipping services and favourable freight rates for a period. these changes have provided norway with increased revenues thanks to a remarkable strengthening of our terms of trade. prices for imported goods are falling in relation to prices for goods we export. the impact of the rise in oil and gas prices is particularly strong, but the terms - of - trade gains on goods in the mainland economy have also been high. the situation in norway differs from that of its nordic neighbouring countries. sales of swedish and finnish high - tech products are growing strongly in terms of volume, but prices are falling. denmark has a diversified business sector, which is moving on a steady path overall. the high energy prices have contributed to increased cross - border capital flows as income is transferred from oil importers to oil exporters. consequently, a savings surplus has been building up in oil exporting countries such as norway. globalisation has also had an impact on the functioning of international capital markets and has created considerable global imbalances. the us trade deficit increased to over 6 per cent of gdp in 2005, while oil exporting countries and east - asian countries are running large current account surpluses and building up high levels of international reserves. the increased savings of oil exporters as well as of some emerging countries have pushed down international interest rates. bond yields have been low, and have stayed low even when short - term interest rates have been raised. however, in recent months bond yields have picked up somewhat. although the world's central banks have pushed short - term interest rates in recent years to their lowest level for a century

, this has not led to a significant rise in inflation. challenges to monetary policy the government has defined an inflation target for monetary policy in norway. norges bank ’ s conduct of monetary policy shall be oriented towards low and stable inflation, with annual consumer price inflation of close to 2. 5 per cent over time. norges bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. since summer 2003, the norwegian economy has experienced a marked upturn. while it took some time for employment to pick up, this is occurring now. employment is moving up and unemployment is falling rapidly. although inflation has increased somewhat, it is still low, even 2½ years after the cyclical change. the trend in prices for consumer goods over the past two or three years is a result of a favourable supply shock to the norwegian and global economies. low inflation is being accompanied by real income growth and a rise in production. since last summer, monetary policy in norway has been oriented towards a gradual increase in the interest rate – in small, not too frequent steps – towards a more normal level. on the basis of current information, this interest rate path provides a reasonable balance between the objectives to be given weight by norges bank in its conduct of monetary policy : • on the one hand, the objective of bringing inflation up to the target and anchoring inflation expectations suggests in isolation that interest rates should be kept at a low level until there are clear signs of higher inflation. • on the other hand, the norwegian economy is growing at a solid pace. capacity utilisation is slightly above the normal level and increasing, and house prices and household debt are rising sharply. in isolation this would call for a tightening of monetary policy. norges bank has decided to use some time to bring inflation back to target and has chosen to gradually shift to a less expansionary stance. the assessments of economic developments ahead will determine how gradual the interest rate increase will be. our current assessment implies an interest rate path where the interest rate is raised by about 1 percentage point this year. this is also in line with expectations in the money and foreign exchange markets. the interest rate was last raised in march. in line with the forecast in the march inflation report, there are prospects of another interest rate increase in the second quarter – at the monetary policy meeting in may or june – and a further increase thereafter. conclusion increased globalisation and the ensuing terms of trade improvements have exposed the