and the service sector. imports are expanding at a brisk pace. there are prospects of continued strong growth in petroleum investment in 2005. employment is rising, albeit still at a moderate pace. monetary policy influences the economy with long and variable lags. there is always uncertainty surrounding inflation developments. a very high oil price may also have an impact on the krone exchange rate. historical deviations between projected and actual developments in the cpi - ate provide an illustration of the uncertainty surrounding the inflation projections. the fall in the value of the krone through 2003, low interest rates and solid growth in the real economy will gradually push up inflation. price developments in recent months have, nevertheless, increased the risk that inflation will remain low for a longer period. thank you for allowing me to make the introductory statement at this hearing.

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