In its submission of 27 March to the Ministry of Finance, Norges Bank stated the following with regard to its conduct of monetary policy: "Consequently, the Bank must be forward-looking in its interest-rate setting. The effects of interest rate changes are uncertain and vary over time. Changes in the interest rate will be made gradually so that the Bank may assess the effects of interest rate changes and other new information on economic developments. If price inflation deviates substantially from the target for a period, Norges Bank will set the interest rate with a view to gradually returning consumer price inflation to the target. Norges Bank will seek to avoid unnecessary fluctuations in output and demand."

The projections in the March Inflation Report indicated that inflation will gradually decline in Norway. With approximately unchanged interest rates, consumer price inflation was projected at 2 per cent in 2003. The new mandate for monetary policy may, however, influence our projections via inflation expectations. The inflation target of 2½ per cent, which is higher than that of the ECB, may raise inflation expectations somewhat. On the other hand, the quantification of an inflation target may have a clarifying effect. The phasing in of petroleum revenues may, in isolation, imply a more expansionary fiscal stance than postulated earlier as a technical assumption in the March Inflation Report. However, the Government has also stated that fiscal policy shall be used to stabilise developments in the Norwegian economy.

World economic growth is slowing and there is uncertainty attached to developments ahead. The Federal Reserve has reduced the target for the fed funds rate by a total of 1½ percentage points since the beginning of the year. The Japanese central bank has in practice reverted to a zero interest rate policy. Interest rates have also been lowered in several other countries.

Capacity utilisation in the Norwegian economy remains high. The labour market is tight. The supply of credit remains high and inflation is high. In February, the year-on-year rise in the consumer price index was 3.6 per cent. Excluding indirect taxes and changes in electricity and petrol prices, underlying inflation was 2.9 per cent. Measured by the import-weighted krone exchange rate, the krone has appreciated by 1.5 per cent compared with the assumption in the March Inflation Report. In isolation, this will have a dampening effect on externally generated inflation impulses.

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