Evaluation of Norges Bank’s Projections for 2003

Abstract

Consumer price inflation in 2003 was substantially lower than previously projected by Norges Bank and other forecasters. The difference between actual and projected consumer price inflation can be mainly explained by a sharp fall in prices for imported consumer goods. This in turn is attributable to the krone appreciation in 2002 and the fall in prices for these goods measured in foreign currency. The rise in prices for goods and services produced in Norway was also somewhat lower than expected. Prices fell more than expected in the last part of 2003 in particular. Weaker economic growth, coupled with increased competition and greater efficiency in a number of industries, probably contributed to pressure on prices for both goods and services produced in Norway and imported consumer goods. Since March 2001, Norges Bank’s operational objective for monetary policy has been low and stable inflation. The inflation target is set at 2½ per cent. Monetary policy is forward-looking. Projections for price inflation and economic developments therefore form an important basis for monetary policy decisions. Analysing forecast error can help us to improve the accuracy of our forecasts in the future and our understanding of the disturbance to which the economy has been subjected. In the light of new, lower projections for externally generated impulses to the Norwegian economy, Norges Bank has revised previous estimates of the exchange rate pass-through to prices for imported consumer goods. Preliminary estimates indicate that the pass-through to these prices may be somewhat weaker, and come later, than previously assumed.