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 the Bank’s 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. Norges Bank’s assessment of the outlook for developments in the Norwegian economy was last presented in the Inflation Report published on 20 June. Price inflation was estimated at 2½ per cent in 2003, assuming that the interest rate remains unchanged.

The risk picture is mixed. The Norwegian economy is still characterised by high capacity utilisation. The labour market is tight. Consumer price inflation rose by a year-on-year rate of 3.8 per cent in June. Excluding the direct effects of changes in excise duties and energy prices, price inflation was about 2.5 per cent. Credit growth is high and the growth rate of household demand for loans continues to increase. There is a risk that domestic pressures will gradually translate into stronger-than-estimated inflationary impulses.

On the other hand, it appears that global economic developments will be weaker than expected. Although business and industry have been sheltered so far from the slowdown in the world economy, the Norwegian economy may gradually be more strongly affected. Sluggish growth in the global economy may reduce the demand for Norwegian goods and ease the pressures in the Norwegian economy. The international slowdown may also curb imported price inflation. In this case, price inflation may be lower than we have estimated.

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.