Norway: Inflation concern
After the remarkable performance of the past few years, the Norwegian economy is now slowing toward its potential rate of growth. Domestic demand is moderating as a result of the increased cost of borrowing, falling house prices and declining terms of trade. Inflation remains higher than desirable and rising labour costs are undermining competitiveness. The off-shore (oil and gas) sector will continue to support mainland demand through spill-over from oil investment.
The central bank should continue to monitor inflation pressures but pay increasing attention to the impact of financial turbulence on the real economy, as it did recently with successive cuts in policy rates. The structural budget deficit is likely to exceed the 4% rule in 2009 due to adverse stock market effects on the value of the Government Pension Fund. While this is appropriate in current cyclical conditions, fiscal stimulus should remain temporary in view of long-term budgetary challenges.