strong krone. this may accelerate the scaling back of manufacturing industry. however, in the long run monetary policy cannot influence overall employment or its distribution across industries. a lower interest rate would have resulted in higher price and cost inflation, which would also have weakened profitability in the manufacturing sector. the end result would have been the same for employment and production, but in addition we would have had to face the costs of high inflation. even if employment and production in manufacturing are affected, the situation for norwegian enterprises will not necessarily be negative. some enterprises could be at the forefront of technological developments and increase efficiency in pace with the relatively high rate of growth in real wages in norway. in recent years, we have also seen that many enterprises have moved large portions of their production abroad, particularly the most labour - intensive production. norwegian manufacturing companies could therefore remain profitable even if the size of the manufacturing sector in the norwegian economy is reduced. however, the scaling back of manufacturing also involves a risk. it makes the economy more vulnerable. the growth potential of the economy – the basis for learning, innovation and development – may be impaired when less of the business sector is exposed to intense foreign competition. over the last thirty years, manufacturing industry has been scaled back in waves. the sharpest declines were observed in the years between 1977 and 1984 and from 1987 to 1992. the declines were preceded by a fall in profitability in this industry. it may take time for a weakening to spill over to output and employment, but when the turnaround first occurs it takes place rapidly and on a large scale. primary industries, in contrast, are scaled back gradually. these developments will take place in addition to the effects associated with the increased spending of petroleum revenues. all in all, employment in manufacturing and agriculture may fall by 2 - 5 per cent of total employment in the period to 2010. employment in manufacturing may drop towards 10 per cent of the total. agriculture may employ less than 2 per cent of total employment. changes in industry structure, with an increase in the number employed in services and a decrease in manufacturing, will probably reduce the role of pay increases in manufacturing as a benchmark for wage determination. among many of norway ’ s trading partners, similar developments have occurred. however, the share of employment in manufacturing and agriculture in norway is already relatively low. pensions while high oil prices have resulted in sizeable revenues and surpluses on the current account and government budgets, growth in mainland output has been low over the last three years

achieving an inflation rate of 2½ per cent two years ahead. norges bank ’ s views on the inflation outlook are presented three times a year in the inflation report. our projection for inflation in the period ahead is presented as well as our assessment of the balance of risks surrounding this projection. the executive board ’ s updated assessments are presented in connection with the monetary policy meetings every six weeks. immediately after each meeting, the bank issues a press release and holds a press conference. the key interest rate is set on the basis of an overall assessment of the inflation outlook two years ahead. our inflation projections and our views on the balance of risks associated with these projections provide a summary of these assessments. norges bank ’ s inflation projection is our assessment of the most probable outcome of the rise in cpi two years ahead. in setting interest rates we also place emphasis on the probability distribution – or the balance of risks – surrounding the projection. therefore, we also publish our judgement of the risk associated with our own projections. the phasing in of petroleum revenues has to be counteracted by a tighter monetary policy than would otherwise be the case. this may be accomplished through an adjustment of the interest rate, an appreciation of the krone or both. small countries have experienced fairly wide exchange rate fluctuations. the swedish krona has depreciated by more than 10 per cent since summer 2000. the australian dollar has weakened by over 30 per cent since spring 1997. the uk, canada and new zealand have also experienced wide exchange rate fluctuations. the norwegian krone, on the other hand, has been relatively stable. a monetary policy that is oriented towards low and stable inflation will contribute to stabilising aggregate demand and output. as a result, the central government budget will not normally have to be used actively to stabilise the economy. an increase in unemployment that is due to a higher rate of increase in labour costs than implied by productivity growth cannot be offset by low interest rates or higher public spending and tax cuts, but requires changes in the functioning of the labour market. the planned use of petroleum revenues implies that the sheltered sector will lay claim to a larger share of the labour force. this will probably cause a decline in manufacturing employment. the ensuing deterioration in competitiveness may lead to restructuring. in the long run, monetary policy cannot influence overall employment or its distribution across industries. norway ’ s terms of trade flucture widely. this is largely attributable to variations in the oil price. however,