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 analyses in Norges Bank's Inflation Report, together with the Bank's current assessment of the outlook for price and cost inflation and developments in the money market and foreign exchange market, provide a basis for decisions concerning the key interest rate.

In its assessment today, the Executive Board placed particular emphasis on the following factors:

In the June Inflation Report, the underlying rise in prices was projected at a good 2 per cent two years ahead with a sight deposit rate of 4 per cent and a krone exchange rate equal to the average for the period 3-19 June. The Report also indicated that a reduction in the sight deposit rate towards 3 per cent, combined with some depreciation of the krone, could bring the rise in prices up to the inflation target two years ahead. If the easing of monetary policy and employment growth do not translate into higher wage growth, inflation could even with this path for interest rates and the krone remain lower than the target two years ahead. Without a considerable easing of monetary policy, inflation might be too low for an extensive period.

Since the previous monetary policy meeting on 25 June, the underlying rise in prices has continued to fall. In July, the year-on-year rise in the CPI-ATE was 0.7 per cent, which is lower than projected in the June Inflation Report and markedly lower than the inflation target. There are also prospects that inflation may be low for some time ahead. The fall in inflation primarily reflects a marked decline in prices for imported consumer goods. In addition, the rise in prices for domestically produced consumer goods influenced by world market prices is slowing.

Growth in the international economy will be sluggish in 2003, particularly in the euro area. Labour market developments are generally weak. Price and cost inflation is low among our trading partners, and is expected to remain subdued. Oil prices are hovering around USD 30 per barrel. Low stocks in the US, uncertainty as to developments in Iraq and high demand as a result of closures of nuclear power plants in Japan are holding up oil prices. Since the end of June, key rates have been lowered by 0.25 percentage point in the US, Canada, New Zealand, the UK and Sweden. Expectations as to global economic developments in 2004 have recently improved somewhat. This applies in particular to financial markets and some confidence indicators. International equity prices have advanced over the past six months. Interest rates abroad are now expected to rise somewhat next year.

In the US, there are now somewhat clearer signs of the expected upswing. GDP grew by 2.4 per cent (seasonally adjusted, annual rate) in the second quarter. According to euro area indicators, businesses and households expect activity to stabilise at a low level. Current indicators do not point to a stronger international upswing than that projected in the Inflation Report. This is reflected in key rates abroad which, even though they are expected to edge up, will remain at a historically low level for a long period ahead.

In Norway, capacity utilisation has fallen from a very high level, and is now on a par with the level in the years 1995-1997 before cost inflation accelerated. Growth in the economy has come to a halt. Employment fell in the second quarter, and according to LFS figures the number of job-seekers has increased. Registered unemployment has edged down, but the number participating in labour market programmes has risen. Developments in manufacturing output are weak. Credit growth is slowing somewhat, but is still at a high level for households. Corporate borrowing is markedly lower. The number of bankruptcies is high.

At the same time, there are also signs that the monetary policy easing and expectations of further monetary policy easing are now having an impact. The krone is about 5-6 per cent weaker than before Norges Bank signalled the possibility of larger steps in interest rate adjustments at the beginning of June, and about 2 per cent weaker than the assumption in the constant interest rate/exchange rate scenario in the Inflation Report. Growth in goods consumption picked up in June. House prices have shown a small rise after stagnating earlier this year. Statistics Norway's business tendency survey for the second quarter indicates that short-term expectations have improved somewhat. At the same time, however, the commercial property market is weak. Vacancy rates for commercial premises are high and rents have fallen. This will have an impact on investment in the period ahead. Activity in many public entities still appears to be affected by the time it takes to cover the expensive income settlements last year and in previous years.

Developments in the Norwegian and international economy since the previous monetary policy meeting have been approximately in line with the projections in the Inflation Report, but consumer price inflation has been lower than projected. There are prospects that the underlying rise in prices in Norway will remain very low for a period ahead. At the same time, inflation is low in other countries. In a situation where there is a risk that inflation expectations take hold at a level that is too low, it will be appropriate to take larger steps in interest rate adjustments than that which is customary.

The spring wage settlement and information on local wage developments so far this year would indicate a more moderate wage settlement ahead than in the years between 1998 and 2002. These prospects strengthen the basis for the larger steps in interest rate adjustments.

According to Norges Bank's assessment, even with an interest rate of 3.0 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 connection with the Executive Board's monetary policy meeting:

International economy (209 kB)

Financial markets (299 kB)

Demand and output (105 kB)

The labour market (72 kB)

Prices (75 kB)