The objective of monetary policy is stability in the exchange rate against European currencies. 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 a regular assessment of the outlook for price and cost inflation and conditions in money and foreign exchange markets, provide a basis for decisions regarding monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 23 March in the March 2000 Inflation Report. The June 2000 Inflation Report is currently being prepared and will be presented in one week.

The international economy is expanding rapidly.

Short-term international interest rates have risen markedly since the beginning of the year. Central banks have raised their key rates, and market participants expect further increases in a number of countries. The effective krone exchange rate, measured by the import-weighted krone exchange rate against 44 countries, has depreciated by nearly 5 per cent since the start of the year. The krone has depreciated by some 2.5 per cent against the euro in the same period.

Consumer prices in Norway rose by 2.8 per cent in the last twelve months to May. Underlying price inflation, which excludes electricity prices, indirect tax changes and adjusts for the changeover to a monthly house rent index, was 2.6 per cent.

The labour market is tight. Reforms are curbing labour supply. The wage settlement suggests that the rise in labour costs will be considerably higher than in the euro area. Movements in the krone exchange rate may contribute to increases in prices for imported goods. Private consumption is rising and growth in credit to households has increased since the beginning of the year. House prices have risen appreciably.

Petroleum investment, however, appears to be lower than previously expected. The investment intentions survey for the second quarter indicates that manufacturing investment will continue to contract next year. Imports are sluggish, underpinning the impression of a low level of investment activity.

The management of the central government's expenditure and revenues, as expressed inter alia in connection with the Revised National Budget for 2000, is contributing to lower pressure in the domestic economy than we would otherwise have experienced.

On the whole, the changes in economic prospects suggest that there will be slightly stronger price and cost pressures in the Norwegian economy than we estimated in the March 2000 Inflation Report.