The objective of monetary policy is low and stable inflation. The inflation target is set at 2½ per cent. The key rate is set on the basis of an overall assessment of the inflation outlook, normally two years ahead.

The analyses in Norges Bank's Inflation Report, together with its current assessment of the inflation outlook and developments in the money market and foreign exchange market, provide a basis for decisions concerning monetary policy instruments. The analyses in the Inflation Report presented today indicate that at the current interest rate level there are prospects for achieving the inflation target over the next two years. However, the risk picture is mixed. Capacity utilisation in the Norwegian economy remains high. There is a shortage of labour and labour costs are rising at a fairly rapid pace. Consumer price inflation has picked up, rising by a year-on-year rate of 4.3 per cent in May. Excluding the direct effects of changes in excise duties and energy prices, price inflation was about 2.7 per cent. The financial position of households is solid and credit growth remains high. Against this background, there is a risk that domestic pressures will translate into stronger-than-estimated inflationary impulses.

On the other hand, the slowdown in world economic growth has been substantial, and there is a risk of slower growth and a longer downturn. Norwegian industries have so far been sheltered to a greater extent than usual from international developments. This applies to the oil industry, and also to export industries such as aluminium production and the fish farming industry. If there is a new wave of negative news about global economic developments, the effects on the Norwegian economy may be stronger. This could also curb the rise in prices compared with our estimates. The krone is now stronger than the technical assumption underlying the analyses in the Inflation Report.

According to Norges Bank's assessment, with an unchanged interest rate ahead the probability that inflation two years ahead will be higher than 2½ per cent is the same as the probability that it will be lower.