petroleum investment and increased activity in the business sector are paving the way for a rise in employment in the period ahead. on the other hand, intensified competition and continued rationalisation in the business sector may have a dampening impact on labour demand. this year, employment growth is expected to be fairly moderate even if there is a sharp rise in output. only a slight decrease in unemployment is projected for 2004. unemployment is projected to edge down in 2005 and 2006. after several years of high wage growth, pay increases in last year ’ s settlement were more moderate. annual wage growth was nonetheless 4½ % as substantial increases with effect from 2003 were awarded in the 2002 main wage settlement. wage growth is projected to decline to 3¾ % this year. the labour market appears to be improving somewhat more rapidly than expected previously. in isolation, this may contribute to pushing up wage growth relative to previous projections. the effect is, however, expected to be more than offset by the prospects of very low inflation this year. in 2005 and 2006, wage growth is projected to increase as a result of a tighter labour market and higher inflation. there has been a tendency in recent years for a larger portion of pay increases to be agreed in the first year of the two - year period covered by the main agreement. if we consider these two - year periods together, the estimated relationship between wage growth and developments in the labour market are approximately in line with that observed since the mid - 1990s. developments in real economic variables are mirrored in credit markets. in recent years, household income has shown solid growth, and household confidence has been high. however, corporate earnings have been low, and until recently enterprises have primarily focused on enhancing efficiency. credit developments are giving ambiguous signals to our interest - rate setting. growth in household borrowing is high, but enterprises are reducing debt. the change in the breakdown of credit may have been amplified by banks ’ increased eagerness to extend credit to households after a period of losses on loans to the business sector. some reports from our regional network indicate that there are some restraints on credit for the business sector in some areas. developments in credit to enterprises shadow developments in their investments. low credit growth indicates that mainland business investment has not yet picked up. total credit is expanding broadly in line with normal growth in nominal gdp. norwegian households generally finance their mortgages at an interest rate that follows the short - term money market rate. floating interest rates tend to vary widely over time. the interest rate level is very low at

thus seem as if we are placing more weight on the output gap in the beginning of the period than at the end of the period. this suggests that the reference path in inflation report 3 / 06 is not consistent with a discretionary policy, where you make the best out of the situation in each period. such a strategy would have involved a higher interest rate in order to provide a better balance between inflation and output towards the end of the projection period. rather, it seems that the reference path has elements of commitment. let us therefore assume that we follow the response pattern we have committed ourselves to earlier. in the literature, one such strategy is referred to as commitment under a timeless perspective. 5 it is possible to calculate, within the confines of our models, an optimal interest rate path based on such a strategy. see for example woodford, m. ( 1999 ) “ commentary : how should monetary policy be conducted in an era of price stability? ”, paper presented at the jackson hole conference, see http : / / www. columbia. edu / % 7emw2230 / jhole. pdf. in this example, we have been able to reconstruct ( approximately ) the reference path in inflation report 3 / 06 by minimising a loss function under commitment in a timeless perspective. to reconstruct the reference path, the weight on the output gap in the loss function, lambda, has been set at 0. 3. we also had to place a weight on changes in the interest rate in the loss function. this weight, which penalises large changes in the interest rate, can be defended based on considerations regarding robustness and financial stability. what is the outcome if we depart from our established response pattern? the chart illustrates what might happen if the central bank reoptimises today, but promise never to do so again. in the model, this will result in a marked rise in interest rates today. but such an approach has been criticised in the literature. if the central bank departs from its response pattern today, it is easy to believe that it will do the same in the future. it may therefore be difficult to gain credibility for such a policy. even if it may feel tempting, it is important to be aware of the costs associated with departing from an established response pattern. it will then be more demanding to influence private - sector expectations. frequent reoptimisations will in practice undermine the benefit of commitment and lead to a discretionary policy. the