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

The baseline scenario in the Inflation Report published on October 30 was based on the assumption of a krone exchange rate equal to the average for the previous three months. Inflation at the end of 2004 was projected at 2½ per cent. In the same report, analyses based on alternative exchange rate assumptions showed that with a 3 per cent appreciation of the krone, inflation two years ahead would fall to 2¼ per cent. In November and thus far in December, the krone has generally been 1½-2 per cent stronger than the exchange rate assumption in the baseline scenario.

Price inflation has been approximately as expected. Adjusted for tax changes and excluding energy products, the year-on-year rise in consumer prices was 2.0 per cent in November 2002.

The recovery in the international economy is weak and uneven. There is uncertainty as to when the expected rebound in investment will occur and concern about the possibility of war. The German economy is stagnating. Key rates have been reduced in the US, the euro area, Denmark and Sweden. The oil price is somewhat lower than assumed in the October Inflation Report but remains high.

In Norway, there are also signs that developments may be somewhat weaker than expected. Manufacturing as well as households have become more pessimistic. A sharp increase in electricity prices will curb growth in household real income.

Household borrowing is still high and the household debt burden continues to rise. Although growth in credit to households slowed somewhat from October 2001 to October 2002, double digit growth continues. The rise in house prices now appears to be tapering off. Rental prices for commercial property have fallen. Developments in the housing market and less optimism in the household sector may reduce credit growth in the future.

The budget compromise of 22 November reallocated about NOK 4.4 billion. The structural, non-oil deficit in 2003 is thus the same as the Government's proposal in the National Budget for 2003. Underlying real growth in central government budget expenditure is still estimated at about ½ per cent. A corporate tax cut, which has been approved for the fiscal year 2003, will reduce government revenues the following year.

Our regional network has reported that many enterprises are focused on reducing costs following this year's costly wage settlement. The strong krone will weaken profitability in the export industry. Many sectors are reporting reduced demand and declining profitability, although the picture is more positive for retail trade and some private service industries.

Current statistics indicate some sluggishness in the labour market. Unemployment has risen in all counties and for most occupational groups. Unemployment is rising in particular in some service industries. At the moment, there is no sign of substantially higher unemployment in counties where manufacturing dominates. We have not yet seen the full effect of weak competitiveness on employment in industries and regions that are particularly exposed to international competition.

Overall, these trends point to somewhat lower price inflation ahead. According to Norges Bank's assessment, with an interest rate of 6.5 per cent, the probability that inflation two years ahead will be lower than 2½ per cent is greater than the probability that it will be higher.

Charts used in connectionwith the Executive Board's monetary policy meeting:

The global economy (220 kB)

Financial markets (296 kB)

Demand and production

The labour market (68 kB)

Prices (68 kB)