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 its continuous evaluation of the outlook for price and cost inflation and conditions in money and foreign exchange markets, provide the basis for decisions regarding monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 16 December in the December 1999 Inflation Report.

The krone exchange rate against the euro has been relatively stable since the beginning of the year. The krone has weakened somewhat against the US dollar, pound sterling and the Swedish krona. This has resulted in a depreciation of the krone measured by the trade-weighted index. Short-term interest rates have edged up both in international markets and the domestic market, while long rates have drifted down since the beginning of the year. A number of central banks have tightened monetary policy since the beginning of the year. Market participants expect central banks in several countries to take further measures in the period ahead with a view to preventing higher inflation.

So far, developments both internationally and in Norway have deviated somewhat from the projections presented in the December Inflation Report. In Norway, consumer price inflation was 3.2 per cent in February. In recent months, price inflation has been slightly higher than expected. The rise in oil prices has pushed up inflation in Norway and abroad. The quarterly national accounts for the fourth quarter of 1999 indicate that economic growth was markedly higher in the second half of 1999. So far this year, short-term statistics suggest that economic growth will be higher than projected. House prices are rising. Domestic credit growth remains high and household consumption has picked up. There are also clear signs of higher growth in the global economy. Traditional merchandise exports have increased in recent months, and prices for Norwegian export goods have edged up.

On the other hand, petroleum investment in Norway is expected to contract further this year. Weak corporate profitability in 1999 may contribute to restraining fixed investment in general. The effect of high oil prices on international developments is uncertain, but the effect on price inflation may lead to higher interest rates. A correction in share prices may also have an impact on developments in the real economy.

Norges Bank will present its Inflation Report for the first quarter of 2000 in one week. The report is now being drafted but evidence suggests that both economic growth and price inflation may be somewhat higher over the next two years than projected in the December Inflation Report. There seems to be little risk of a downturn. Norges Bank has left its key rates unchanged since September 1999. In the light of recent trends in the economy and the balance of risks, the probability that the next change in interest rates will be an increase is greater than the probability of a reduction.