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 Bank’s December 2000 Inflation Report is being prepared, and will be presented on 21 December. There is little risk of a deflationary recession. Norges Bank has not changed its assessment of the effects of the budget, as expressed in the Bank’s submission of 19 October 2000 to the Ministry of Finance, the “Budget Submission”. Projections for real underlying growth in government budget expenditure and the tax programme indicate that fiscal policy will entail somewhat higher price inflation in the short term than previously estimated. On the other hand, slower economic growth will have the opposite effect.

The effective import-weighted krone exchange rate, which is an indicator of international price impulses affecting the Norwegian economy, has strengthened somewhat since the last monetary policy meeting on 1 November, but is almost 3 per cent weaker than it was at the beginning of 2000. The krone has depreciated against the euro since the November meeting and is at approximately the same level as at the beginning of the year.

The expected slowdown in world economic growth now appears to have commenced, and interest rate expectations have therefore been revised downwards in a number of countries. In the euro area, the UK and the US, market participants are expecting somewhat lower interest rates. In Sweden, the marginal lending rate was raised last week, and further interest rate increases are expected during the first half of 2001.

Price inflation in Norway is high. The year-on-year rise in the consumer price index was 3.2 per cent in November. Underlying price inflation, ie excluding indirect taxes and changes in electricity prices and adjusted for the revision of the house rent index, stood at 3.0 per cent in November. If the direct effect of the petrol price is also excluded, price inflation was 2.6 per cent. The credit supply continues to grow substantially, although the growth rate slowed in October. The labour market is tight. In recent years, labour costs in the business sector have risen at a considerably faster pace than wage growth in the euro area countries. This trend will continue this year and in 2001. High labour cost increases in Norway are contributing to maintaining price inflation at a high level. On the other hand, the national accounts for the third quarter indicate that growth in the Norwegian economy is slowing. House prices appear to be stabilising. Growth in goods consumption has moderated. The slowdown in the global economy will also contribute to reducing growth in demand.

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.