Introduction
In the period 1986 to 1992, Norway had a fixed exchange rate system whereby the krone exchange rate was kept within a band defined by a central rate and maximum permitted fluctuation margins. This system had to be abandoned in December 1992 following extensive speculation against the krone during the turbulence in European exchange markets. The krone depreciated slightly just after this crisis, but then remained stable without extensive use of Norges Bank's instruments. There were several reasons for this. The Norwegian economy expanded steadily in the first half of the 1990s. Price inflation was low, fiscal policy was well adapted to the economic situation, and oil prices were broadly stable.
Since 1996, the conditions for exchange rate stability have not been as favourable. In the autumn of 1996 and the winter of 1997 the krone was strong. Interest rates were then reduced somewhat to counter an excessive appreciation of the currency. Throughout 1998 the crisis in Asia, and later Russia, resulted in substantial international financial unrest. At the same time, wage growth was high due to strong pressures in the labour market, and the current account showed a substantial deterioration as a result of low prices for our export goods and sharp growth in imports. All in all, this generated expectations of a weaker krone exchange rate. The krone gradually depreciated through the first half of 1998. The pressure on the krone intensified in August and the exchange rate was, for a brief period, close to 115 against the ECU index - which today would correspond to about NOK 9.20 against the euro.
Norges Bank increased its key interest rates in seven steps through 1998, by a total of 41/2 percentage points. Following the last rate increase on 25 August, the most important key rate - the rate on banks' sight deposits with Norges Bank - stood at 8 per cent. The sharp increase in interest rates was not sufficient in the short term to return the krone to its initial range. Norges Bank nevertheless deemed that further interest rate increases would not strengthen the krone, as this would not be perceived as a credible orientation of monetary policy. Among other factors, the fiscal tightening incorporated in the budget for 1999 contributed to a gradual return of the krone exchange rate back to its initial range.
The interest rate level that was established was not so high that it would result in an abrupt turnaround in the economy with a sharp rise in unemployment, but still high enough to reduce inflation expectations. Former Central Bank Governor Kjell Storvik stated in this connection the following in an address on 28 August 1998:
"I would also point to the well-known fact that a lower krone exchange rate may contribute to fuelling inflation expectations and that such expectations may in turn generate expectations of a weakening of the krone exchange rate, thereby reinforcing depreciation pressures. Price expectations may thus prove to be self-fulfilling. The interest rate level which has now been established should, in addition to directly contributing to stabilising the krone exchange rate, dampen price expectations, which in turn implies that expectations of a further depreciation will gradually recede".
The krone has appreciated through 1999, and the krone exchange rate has in recent months generally hovered between NOK 8.10 and 8.40 against the euro. So far this year, Norges Bank has lowered its key rates by a total of 2.5 percentage points. The bank's deposit rate in Norges Bank, which steers short-term money market rates, currently stands at 5.5 per cent.
Developments in recent years illustrate that Norges Bank does not have instruments for fine-tuning the exchange rate, but must orient monetary policy towards fulfilling the fundamental preconditions for exchange rate stability. Developments also illustrate that there is a close relationship between the implementation of monetary policy and the formulation of fiscal policy.
Against this background, in this submission Norges Bank states its position on the implementation of monetary policy and presents its views on the overall stance of economic policy for 2000.
The objective of monetary policy
The political authorities formulate Norges Bank's mandate for the conduct of monetary policy. The mandate is laid down in the Exchange Rate Regulation, adopted by Royal Decree, of 6 May 1994. Section 2 of the Regulation states:
"The monetary policy to be conducted by Norges Bank shall be aimed at maintaining a stable krone exchange rate against European currencies, based on the range of the exchange rate maintained since the krone was floated on 10 December 1992. In the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range. No fluctuation margins are established, nor is there an appurtenant obligation on Norges Bank to intervene in the foreign exchange market".
In the following Norges Bank will provide its interpretation of the Exchange Rate Regulation, on which the Bank bases its implementation of monetary policy.
The first sentence in the Regulation shows that we have a managed float of the krone, based on the range of the exchange rate maintained since the krone was floated in December 1992. Instruments are to be oriented towards maintaining stability in the krone exchange rate against European currencies. Norges Bank has chosen to define the reference "European currencies" as the euro from 1 January 1999.
The Regulation does not stipulate a central rate with specific fluctuation margins. Norges Bank interprets the concept "the initial range" as a broad indication of a central rate around which the krone may fluctuate.
The second sentence in the Regulation refers to "significant changes" in the exchange rate in relation to the initial range. The concept "significant changes" is not quantified. "Significant" must therefore be given an economic content. A reasonable interpretation is that a "significant change" is a change that influences expectations concerning price and cost inflation to the extent that changes in the exchange rate become self-reinforcing.
The expressions "with a view to", "over time", "aimed at" and "based on" show that the Exchange Rate Regulation provides Norges Bank with scope for exercising discretion.
In exercising this discretion, Norges Bank focuses on the fundamental preconditions for achieving stability in the krone exchange rate. In order to achieve exchange rate stability against the euro, monetary policy instruments must be oriented in such a way that price and cost inflation is brought down towards the corresponding aim for inflation for the European Central Bank (ECB). At the same time, monetary policy must not in itself contribute to deflationary recessions, as this would undermine confidence in the krone.
The implementation of monetary policy
Monetary policy is conducted through two main instruments - exchange-market interventions and the Bank's key interest rates. Interventions influence the supply of kroner in the exchange market. A change in interest rates influences both conditions in the exchange market and total demand and production. Monetary policy may thus influence price and cost inflation through both these channels.
In Norges Bank's experience, extensive exchange-market interventions have yielded poor results. If the central bank intervenes heavily to defend the krone, this may evolve into a game situation in which market participants perceive central bank interventions as an interesting opportunity to make a profit. Market agents know that a situation in which the krone is being propped up because Norges Bank is intervening cannot be sustained. It is then tempting to take positions in the foreign exchange market against the central bank. This implies that heavy interventions may intensify the pressure on the krone over time, steadily increasing the necessary volume of interventions. If market participants assume that Norges Bank will use the interest rate to defend specific exchange rate levels, this may lead to a similar game situation.
Norges Bank does not intend to behave in a way, which will prompt such game situations. However, the Bank may use interventions to a limited extent if the exchange rate moves substantially out of line with what we consider to be reasonable based on fundamentals or in the event of exceptional short-term volatility in thin markets. In such circumstances, there is less risk of ending up in a game situation against exchange market agents.
Norges Bank's most important instruments are its two key rates - the interest rate on banks' deposits and the overnight lending rate. Experience shows that the central bank's key rates have a fairly substantial impact on money market rates at the very short end of the market, ie overnight and one-week rates. The effect on interest rates on financial instruments with longer maturities is not as direct. Here, expectations concerning the central bank's course of action and general confidence in monetary policy play a role, in addition to the level of very short-term rates.
The interest rate on financial instruments with the longest maturities will largely reflect international conditions and confidence in Norway's economic policy. If inflation expectations remain low and fiscal policy financially sound, long-term interest rates will normally shadow corresponding rates abroad. However, there will still be differences between long-term rates in different countries. For example, the yield on a ten-year government bond will be influenced by expected interest rate movements throughout the period until the bond is redeemed. Furthermore, the premia for different types of risk, for example a lack of sufficient liquidity in small markets, will have an effect. Lack of confidence in economic policy may also be factored into long-term rates.
Confidence is a fragile asset. It takes time to build up, but little to destroy. If confidence is broken, substantial sacrifices may be required to restore it. Norges Bank's opinion is that the possibility to ensure confidence in Norway's monetary policy is increased by focusing on the fundamental preconditions for exchange rate stability. In this connection, Norges Bank emphasises transparency and communication of how monetary policy will be conducted.
The experience of the last fifteen years demonstrates that financial crises can often trigger or amplify cyclical fluctuations. Substantial and surprising changes in monetary policy can also trigger such financial crises. Norges Bank is of the view that also the concern for financial stability can best be promoted by focusing on the fundamental preconditions for exchange rate stability, avoiding abrupt shifts in interest rates. In addition, other economic policy components, including the tax system and framework conditions in financial markets, will influence the possibility of securing stability in the financial system.
Money market rates influence the krone exchange rate directly through the return that can be achieved on krone positions, but also indirectly through the effect on the outlook for the real economy and price and cost inflation in Norway. Normally, a greater number of investors will want to maintain krone positions if the interest rate -and thereby the return on krone positions - increases. A higher interest rate will, therefore, normally result in an appreciation of the krone in the short term. A high interest rate, however, can also lead to a recession. This in turn may result in expectations of a weaker krone and lower interest rates in order to boost production and employment, accompanied by a fall in share prices and the value of other long-term investments. With such prospects, market agents may lose confidence in monetary policy, fear losses on their investments and sell kroner even though the interest rate is high. Therefore, Norges Bank cannot set interest rates to levels where monetary policy in itself contributes to a deflationary recession, which would undermine confidence in the krone.
Similarly, lower interest rates will normally result in a weakening of the krone. This implies that Norges Bank can usually counter an undesirable appreciation of the krone by reducing interest rates. However, if interest rates are set to levels where monetary policy generates inflation, this will undermine confidence in monetary policy. This may carry over into a considerable risk for a strong market turnaround, inducing instability in the exchange rate. Subsequently, it may at a later stage prove necessary to keep interest rates high over a prolonged period of time to restore confidence, even when the krone was strong at the outset.
The Regulation's requirement as regards returning the exchange rate over time to its initial range may - if stretched - imply an excessive element of parity policy. For example, in a hypothetical scenario with a sharp and prolonged fall in oil prices, the krone exchange rate may remain outside the initial range for some time. If Norges Bank responds by raising interest rates in order to force the exchange rate back to its initial range, monetary policy could lead to a deflationary recession. Similarly, after an appreciation, a situation may arise in which a movement of the exchange rate back to the initial range would require interest rates to be reduced to levels where monetary policy generates inflation. In both cases this would weaken the basis for exchange rate stability over time. Hence, Norges Bank cannot with open eyes orient monetary policy instruments towards triggering inflation or a deflationary recession.
If a situation arises whereby Norges Bank is not able to return the krone to its initial range without such consequences, the Bank will inform the authorities that measures other than those available to the central bank are required. One possibility could then be to recommend fiscal measures that make it possible to bring the krone exchange rate back to its initial range and stabilise it. In the event of major and lasting shifts in the economy, fiscal policy and wage formation must contribute to restoring balance in the economy. However, if fundamental conditions were to be permanently changed for the Norwegian economy, it may also be appropriate to consider changes in the guidelines for monetary policy.
Norges Bank orients monetary policy with a view to fulfilling the fundamental preconditions for exchange rate stability. Norges Bank does not have instruments for fine-tuning the exchange rate. The krone exchange rate must therefore be expected to fluctuate in the short term. Attempts to fine-tune the exchange rate may undermine confidence in monetary policy, and thereby exchange rate stability, over time. If the krone exchange rate changes, it is necessary to consider the interest rate level in the light of exchange rate movements over some time so that the fundamental preconditions for exchange rate stability are fulfilled. In general, the reasons for exchange rate movements must be carefully assessed before Norges Bank adopts monetary policy measures.
Co-ordination of economic policy
In Norway, fiscal policy has played a prominent role in demand management. However, economic developments also include price and cost inflation, and thereby the optimal interest rate to be set by Norges Bank. At the same time, changes in interest rates and the exchange rate influence developments in the real economy in the short term. This implies that monetary and fiscal policy reciprocally influence the total level of activity in the economy. Hence, it is important to consider the interaction between these two elements of economic policy.
The National Budget states:
"The Government's economic policy is based on the following key elements:
- Fiscal policy has the main responsibility for stabilising growth in the demand for goods and services.
- Monetary policy is oriented towards maintaining a stable krone exchange rate against European currencies.
- Cooperation between the social partners shall contribute to moderate price and cost inflation.
- Structural policy shall contribute to the best possible management of labour, capital and natural resources".
The most important task of monetary policy is to provide a nominal anchor for the economy. Since 1986, the authorities have oriented monetary policy towards maintaining a fixed or stable krone exchange rate against other currencies. Norges Bank refers to the discussion above, where the Bank states that monetary policy will be conducted with a view to fulfilling the fundamental preconditions for exchange rate stability.
Norges Bank would point out that the social partners, through the income settlements, have an opportunity to influence the total level of employment over time. Compared with other countries, Norway has generally recorded a low level of unemployment and a high participation rate the last 25 years. Many countries that have experienced prolonged and deep recessions have seen a sharp and permanent increase in unemployment. One feature of wage formation in Norway has been the considerable emphasis placed on cost competitiveness in wage negotiations, even for wages in sectors that are not exposed to strong competition from abroad. This has contributed to stability, both in terms of the conditions for exposed industries and in maintaining high employment. Against this background, Norges Bank is of the view that the most important contribution to be made by such settlements is to ensure that structural unemployment in Norway remains low and employment high.
Fiscal policy can influence fluctuations in production and employment. In the long term, the structure of fiscal policy, including the tax system and government investment, may influence the growth potential of the economy. Furthermore, the growth in the public sector called for by the authorities will influence the allocation of labour and capital between sectors. However, in the absence of substantial unutilised reserves of labour or capital, stabilisation policy measures are not suitable for influencing the total level of production and employment over time. An expansion of the public sector in an economy with high capacity utilisation will thus, result in a corresponding reduction in the level of activity in the private sector.
Over time, changes in the price level are influenced through monetary policy. Employment may be influenced through the wage formation process. The allocation of resources between the sheltered sector and the internationally exposed business sector may be influenced through fiscal policy. Over time, the size of the exposed sector will be determined by a contest for economic resources between the public sector and the exposed business sector.
In the short term, both monetary policy and fiscal policy can influence developments in employment, prices and the distribution of resources between sectors. Fiscal policy plays an important role for the stability of the krone and for Norwegian interest rates. Hence, it is essential that the policy mix is appropriate.
A special situation arises if fiscal policy generates higher growth in demand for goods and services from sheltered industries while there are still considerable pressures in the economy. In this situation, the contest for economic resources must inevitably result in deteriorating competitiveness and a reduction in value added in the exposed sector. If there is little confidence in Norwegian economic policy, this may result in expectations of higher inflation and an unstable exchange rate. Norges Bank must counter any developments that in this way would erode the fundamental preconditions for exchange rate stability. If, on the other hand, there is confidence that policy is geared towards fulfilling these fundamental preconditions, i.e. that monetary policy will not inflate the economy, market agents might expect a deterioration of cost competitiveness through an appreciation of the krone. Norges Bank would not be able to counter such an appreciation without generating inflation. Norges Bank's first response when it sees such pressures building up in the forex market, would be to recommend changes in the government budget. However, if an appreciation of the krone should reflect a political desire to expand public sector activity, and this is assigned higher priority than continued growth in activities exposed to international competition, it would also be appropriate to consider a revision of the guidelines for monetary policy.
In view of its mandate and responsibilities, the best way for Norges Bank to contribute to an appropriate policy mix is probably to be transparent, both as regards its economic analysis and as regards its pattern of reactions. This would allow the authorities to take the implications for Norges Bank's setting of interest rates into acccount when the government budget is decided.
One measure of the budget's total demand impact is the non-oil, cyclically adjusted budget deficit net of interest payments. This is, however, a rough indicator of the budget's overall effect. It is therefore also necessary to consider the composition of the budget, including spending growth, in order to form an opinion of the total impact of fiscal policy.
Higher general government expenditure can, in principle, be neutralised through an increase in taxes so that expanded public sector activity is offset by an equivalent decline in household demand. In practice, however, it is difficult to increase direct or indirect taxes without adversely affecting the business sector. Employees and others may respond by demanding higher wages in order to prevent an increase in direct and indirect taxes from curbing growth in real income, and they will generally be more successful the tighter the labour market is. Enterprises in the sheltered sector will attempt to pass on higher costs to households, and will be more successful in doing so the higher the level of activity is. In industries that are exposed to strong international competition, enterprises do not have this possibility.
Furthermore, higher expenditure on public sector employment will have direct effects on labour market conditions. A corresponding increase in household tax levels will normally not have as strong an effect in the labour market, partly because imports account for a fairly high share of private consumption and because some of the increase in taxes can be offset by reduced private saving. It does not appear likely that, over time, it will be possible to implement a policy involving a continued tightening for households through tax increases. A substantial expansion of the public sector, in excess of the rate implied by trend growth in the economy, will thus normally entail a reallocation of resources from exposed to sheltered activities.
What may be considered an appropriate size for the public sector is not given, and the demand for services from the public sector can change over time. A strong and efficient public sector is an important element in the interplay in the economy that can contribute to higher growth and welfare. However, the public sector also depends on private sector income growth, which may sustain revenues when petroleum activity no longer dominates the economy. The tradable goods sector is vulnerable. Revenues fluctuate considerably and globalisation is on the rise. Given the Norwegian economy's dependence on oil, there are risks associated with a further weakening of the basis for mainland business activity. This implies that the growth in government budget expenditure normally should not exceed the trend rate of growth in the mainland economy.
Studies carried out by the Moland Committee show that the central government will be facing considerable challenges when the postwar baby boom generation retires. The implications of an ageing population for government finances will be fully evident before the end of the next decade. New estimates for generational accounts are presented in the budget for 2000, showing that the general government budget surplus should, on a sustained basis, have been in the order of NOK 5-20 billion higher than in the budget for 2000 in order to avoid a higher tax burden for future generations.
The central government now has considerable surpluses as a result of the cash flow from petroleum activities. This cash flow reflects a transfer of wealth from oil and gas reserves to other investments. At the same time, the total future cash flow, which represents the central government's share of petroleum wealth, is highly uncertain. Oil prices fluctuate. Developments in oil and gas production are also very uncertain. Chart 2.28 in the National Budget shows that the risk that oil production will fall by 50 per cent or more during the next ten years is about 10 per cent. Many households and enterprises would have been willing to pay a substantial insurance premium to avoid such a high risk of income losses.
The central government also has considerable wealth through its ownership of Norwegian companies. Revenues in many of these companies will depend on movements in the oil price, either directly in companies involved in oil activities or indirectly through the level of income and demand in Norway.
Through the Government Petroleum Fund the central government will gradually accumulate a source of income that is not dependent on the oil price or the level of domestic activity. This will over time make government finances less vulnerable to fluctuations in the oil price and petroleum production.
The Government Petroleum Fund also plays an important role in the implementation of monetary policy. Through the Fund a large portion of the central government's foreign currency earnings from oil and gas is invested abroad. By investing these foreign currency earnings abroad, the balance in the krone market is maintained.
The Petroleum Fund acts as a buffer against short-term fluctuations in petroleum revenues. As a large share of petroleum revenues accrues to the state, swings in oil prices will primarily result in changes in allocations to the Fund. Since all of the Fund's capital is invested abroad, such changes will in principle not influence economic activity.
If, however, short-term fluctuations in petroleum revenues were to be absorbed in the economy through fiscal policy, the exchange rate may become the buffer instead of the Petroleum Fund.
The Petroleum Fund can curb the impact of oil prices on the krone exchange rate. A substantial change in petroleum wealth, however, may induce Norwegian and foreign investors to shift their portfolios to or from Norway because the prospects for the Norwegian economy have changed. Such portfolio shifts influence the krone exchange rate. Nor can it be ruled out that households will adapt their savings ratio to savings in the public sector, thereby entailing a change in domestic demand. Hence, even if budgetary policy remains firm and the domestic use of petroleum revenues remains unchanged in the short term, it is difficult to prevent substantial changes in the oil price from having some effect on the Norwegian economy through changes in the krone exchange rate or in household demand. These price changes, however, seldom occur and should not be an obstacle to long periods of exchange rate stability.
Economic developments
The Norwegian economy has experienced a period of robust growth. Mainland GDP showed an average growth of a good 31/2 per cent between 1993 and 1998. Employment rose by more than 240 000 in the same period. Much of this growth has been fuelled by domestic demand. However, growth in demand was higher than trend growth in the economy, resulting in mounting pressures in the economy. As a result of a steadily tighter labour market, price and cost inflation in Norway has been higher than the average in Europe in recent years. Particularly as a result of the income settlement in 1998, wage growth in the last two years combined came to a good 10 per cent. Relative labour costs compared with trading partners are now back to about the same level recorded in 1992. Since 1994, hourly wage costs in Norway have shown an increase that is over 6 per cent higher than the rate recorded by our trading partners, apparently without reflecting higher productivity growth.
Norges Bank's projections for economic developments are based on some key assumptions concerning, among other things, interest rates, the exchange rate and fiscal policy. As a technical assumption, it is assumed that money market rates shadow the market's interest rate expectations, represented by implied forward rates. A krone exchange rate of NOK 8.30 against the euro has been assumed. The estimates are also based on a real growth in general government spending of about 2 per cent the next two years, ie approximately on a par with trend growth in mainland GDP.
Norges Bank projects that wage and price inflation will gradually slow and be reduced towards the corresponding aim for inflation in the euro area. The strong expansion that the Norwegian economy experienced since 1992 has now been replaced by a period of slower growth. Growth in the mainland economy is expected to be lower than trend growth both in 1999 and next year, resulting in less tight conditions in the labour market. This is probably necessary for price and cost inflation not to exceed European levels. There is still considerable uncertainty associated with the economic outlook. However, the projections indicate that growth in the mainland economy will be close to trend through the course of 2001. It is important to bear this in mind in the orientation of economic policy.
The 2000 budget bill
The government budget proposal for 2000 entails that fiscal policy will have an approximately neutral effect on aggregate domestic demand, measured by the non-oil, cyclically adjusted deficit net of interest payments. Underlying real growth in central government expenditure is estimated at 21/2 per cent compared with the preliminary accounts for 1999. This is slightly higher than trend growth in mainland GDP and substantially higher than projected growth for 2000. Real expenditures are 31/2 per cent higher than in the budget that was originally adopted for 1999.
The budget documents indicate that there has been considerable slippage in government budget expenditure through 1999. The approved budget for 1999 entailed real underlying growth in government budget expenditure of a good 1/2 per cent. Estimates for the accounts for 1999 show real underlying growth in government budget expenditure of about 11/2 per cent, primarily as a result of supplementary appropriations in connection with the Revised National Budget. On average, during the last four years the underlying growth in central government expenditure has been 11/4 percentage points higher than projected.
Norges Bank would point out that such a systematic slippage in the government expenditure may raise the issue exactly how the fiscal stance is to be interpreted as a basis for the implementation of other economic policy elements and among private sector agents. Norges Bank would further point out that continued slippage at this point in time primarily would affect demand in service industries and in the public sector where pressures are already high and there is limited scope for increasing employment. At the same time, this would weaken the basis for further growth in exposed sectors.
The budget for 2000 shows a generational deficit of between NOK 5 and 20 billion. The obligations associated with expenditure on social security and statutory rights account for a considerable portion of total spending growth. At the same time, part of the growth in expenditure is being financed by higher taxes and non-recurring revenues. It is essential that these imbalances do not persist over time.
The general government surplus will over time largely reflect the central government budget surplus. The non-oil, cyclically adjusted budget indicator will therefore in general be a useful indicator also for the general government sector. On the other hand, total growth in general government expenditure depends on the development of incomes and spending in the local government sector as well as spending growth in the central government budget.
The proposals for the local government sector entail a real increase in local government revenues of about 1/2 per cent, or about NOK 1.1 billion, from 1999 to 2000. It has then been taken into account that the estimate for local government revenues in 1999 has been revised upwards by about NOK 2 billion after the proposition on local government finances was presented. Furthermore, it is assumed that the total deficit in the local government sector will amount to a good NOK 3.2 billion in 2000. This entails that spending growth in the local government sector may be substantially lower than underlying growth in central government budget expenditure. Underlying growth in total general government expenditure is thus likely to be approximately on a par with trend growth in the mainland economy, or slightly less.
Historically, public consumption growth has been considerably higher than expected ex ante. Projected growth in public consumption in 1999 has now been revised upwards from 1.1 per cent in the National Budget for 1999 to 2.0 per cent, even though the approved budget for 1999 entailed a lower growth than assumed in the original budget proposal. On average, growth in public consumption through the 1990s has been about 11/2 percentage points higher than estimated in the National Budget for the respective fiscal year. This has partly reflected changes in central government expenditure and partly higher revenue and expenditure growth in the local government sector than projected.
The Government is proposing an increase in some indirect taxes, including the electricity tax, which combined will contribute to pushing up consumer price inflation by about 1/4 percentage point. This effect of indirect tax increases may be considered an isolated case that will not have lasting effects on price and cost inflation in Norway. Norges Bank will therefore normally not take account of the direct impact of these indirect tax increases on the level of prices. However, if the authorities systematically and over time increase indirect taxes by a rate that is higher than price inflation in the economy, this may be incorporated in the public's expectations concerning the general rise in prices. In that case Norges Bank must take this tendency into account in its projections for price developments in the years ahead. This might have consequences for the possibility of fulfilling the fundamental preconditions for exchange rate stability and thereby for the implementation of monetary policy.
Overall, the Government's budget proposal generally seems to be in line with the assumptions on which Norges Bank bases the implementation of monetary policy. A stronger stimulus from fiscal policy than proposed in the budget bill would intensify pressures in sheltered sectors. In isolation, further fiscal stimulus may thus entail that wage and price inflation in the economy is not reduced to European levels the next couple of years. Norges Bank must in this case take into account that such developments will jeopardise the fundamental preconditions for exchange rate stability.