The objective of monetary policy is stability in the exchange rate against European currencies. Norges Bank does not have the instruments to fine-tune the exchange rate, but when setting interest rates the central bank places emphasis on the fundamental preconditions for exchange rate stability: price and cost inflation must over time be reduced to the level aimed at by the euro area. At the same time, monetary policy must not in itself contribute to deflationary recessions.

The analyses in Norges Bank’s inflation reports, together with its continuous evaluation of the outlook for price and cost inflation and conditions in money and foreign exchange markets, provide the basis for decisions concerning monetary policy instruments. Norges Bank’s assessment of prospects for economic developments was last presented on 28 September in the September 2000 Inflation Report.

The projections in the Inflation Report indicated that price and cost inflation in Norway would gradually slow. According to the assumptions upon which the report was based, consumer price inflation in Norway could decline to just over 2 per cent at the end of 2002. The shape of the projection curves suggested that price inflation might be lower still in 2003.

The krone has appreciated against the euro since Norges Bank’s Executive Board held its last monetary policy meeting on 20 September. The effective import-weighted krone exchange rate, which is a better indicator of international price impulses affecting the Norwegian economy, has also strengthened somewhat since the last monetary policy meeting, but is about 2 per cent lower than it was at the end of 1999.

New information regarding economic developments yields a mixed picture. Price inflation is high. The year-on-year rise in the consumer price index was 3.5 per cent in September. The increase was broad-based, and somewhat higher than expected. Credit growth is high. Local government, non-financial enterprises and households are all contributing to credit growth. The labour market is tight. In isolation, the central government budget proposal may imply somewhat higher consumer price inflation in 2001 and 2002 than previously estimated by the Bank. In the longer term, this effect may be curbed, as higher labour costs will contribute to lower employment in the business sector.

On the other hand, there are now signs of slower growth in consumption and a levelling off of house prices. There are also indications that growth in the global economy may be somewhat lower in the future, partly because of the high oil price.

The interest rate rises so far this year contribute to curbing growth in demand. This will gradually translate into lower consumer price inflation than would otherwise have been the case.

There is uncertainty regarding the overall effect on price inflation of the various forces acting on the economy. Norges Bank will analyse developments more closely in the Inflation Report to be presented in December.

In the light of recent trends in the economy and the current balance of risks, the probability that the next change in interest rates will be a reduction is the same as the probability of an increase.