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.

In Norges Bank's last Inflation Report of 3 July, consumer price inflation two years ahead, with an unchanged interest rate of 6.5 per cent, was projected at 2¾ per cent. At the monetary policy meeting the same day, the Executive Board of Norges Bank decided to increase the key rate by 0.5 percentage point, to 7.0 per cent. There is uncertainty as to developments in many of the factors that will influence inflation in the period ahead. This includes the krone exchange rate. Relationships in foreign exchange markets are unstable. Our projections for inflation in the July Inflation Report were based on the assumption of a krone exchange rate equal to the average for the second quarter. The krone is now somewhat stronger than this. A persistently strong krone will dampen inflation. If the krone depreciates, for example, in line with developments in forward rates for the Norwegian krone, inflation may be higher than 2½ per cent. There has been some movement in foreign exchange markets since the monetary policy meeting in July. The krone exchange rate appreciated in the first weeks of July but has subsequently depreciated. Pricing in the currency options market shows that exchange market participants are considerably more uncertain about developments in the krone exchange rate than they were earlier this year. This reflects unrest and instability in the international foreign exchange, bond and equity markets in July. Equity prices have fallen sharply. The unrest originated in the US. The fall in equity prices was initially due to uncertainty about actual earnings in a number of large US companies and about companies' financial position. The decline in equity prices led to growing uncertainty about the prospects for growth in the global economy and this in turn has influenced equity prices. International financial unrest has also influenced developments on the Oslo Stock Exchange during the summer. The projections in the July Inflation Report were based on the assumption that a moderate upturn in the global economy would gradually take firmer root. Economic indicators since the last Inflation Report have been somewhat mixed. Consumer and business confidence indicators have been weak. Growth in the US was lower than expected in the second quarter. There is now considerable uncertainty about the outlook for the global economy, but this does not appear to have affected the petroleum market. The oil price is high. Confidence in OPEC's ability to balance supply and demand in the oil market as well as the risk of war in the Middle East are influencing prices. In the Norwegian economy, domestic demand is expanding sharply. We expect a high level of housing investment and investment in the petroleum sector. Large projects in the aluminium industry are boosting mainland business investment, whereas other investment may be low. It is assumed that strong growth in household disposable income will contribute to solid growth in private consumption in the period ahead. Growth in domestic credit remains buoyant. Household borrowing is extensive. House prices are high. Developments in unemployment are in line with our projections in the July Inflation Report. The year-on-year rise in consumer prices, adjusted for tax changes and excluding energy products, was 2.7 per cent in June. Price inflation was somewhat higher than projected. Prices for domestically produced goods and services in particular rose more than expected. In the period ahead, strong wage growth will influence developments in prices for domestically produced goods and services.