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 Reports, 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:

The analyses in Norges Bank's June 2003 Inflation Report showed that a reduction in the sight deposit rate towards 3 per cent, combined with some depreciation of the krone, could bring inflation up towards the target two years ahead. The prospect of more moderate wage growth ahead could provide a basis for an even lower interest rate and weaker krone exchange rate without the inflation projections exceeding 2.5 per cent in the period.

Underlying consumer price inflation is low, with a year-on-year rise in the CPI-ATE of 0.9 per cent in August. The rise in prices for imported consumer goods is pushing down inflation. The rise in prices for domestically produced goods influenced by the global market has also slowed recently. The rise in prices for goods and services where wages are a dominant factor is being sustained.

Developments in other countries indicate that prices, measured in the currencies of the producer countries, for imported goods and services will not rise appreciably. It appears that the economic recovery in the US and Japan may occur somewhat more swiftly and be more pronounced than projected in the Inflation Report. Growth in a number of Asian countries has picked up rapidly again following a slowdown this winter as a result of SARS and the war in Iraq. Europe, on the other hand, is still marked by stagnation, and growth this year may be slightly lower than projected in the Inflation Report.

Strong productivity growth in the US economy enables companies to satisfy increased demand without increasing the workforce. The recovery in the US has not led to higher employment, adding some uncertainty concerning the strength and duration of the upturn. High household borrowing and increasing government deficits are having the same effect. Following the meetings of the Open Market Committee in August and September, the Federal Reserve stated that there is a risk of a further and undesirable fall in inflation. There are therefore prospects that short-term interest rates in the US will be low for a period ahead. Interest rates in other countries are also likely to remain low.

In spite of sluggish global economic developments, oil prices have remained high. Low production levels in Iraq have contributed to buoying up oil prices. Strikes and production problems in Venezuela and Nigeria have also played a role. These factors, combined with a need to increase commercial stocks, may result in continued high oil prices.

Capacity utilisation in Norway has declined from a high level and is now on a par with the level in the years 1995-1997, before cost inflation accelerated. Economic growth came to a halt last winter. There are signs that the easing of monetary policy is beginning to have an impact.

The krone has depreciated slightly since the August 2003 monetary policy meeting, and is about 11 per cent weaker than at the beginning of 2003. The depreciation of the krone is contributing to stabilising inflation and activity in the economy. The quarterly national accounts for the second quarter of 2003 showed that the mainland economy grew slightly. Growth in goods consumption has increased, as expected. Households are now more optimistic about the economic outlook. Household debt is still increasing at a high rate, but growth has slowed since the spring. House prices have stabilised after falling slightly in the first half of 2003. Housing turnover is high. The rise in equity prices since the beginning of 2003 may reflect improved corporate profitability and increased optimism regarding the outlook ahead.

According to Norges Bank's regional network, activity in retail trade and services for households has increased since the spring. Both the domestic and export market for manufacturing have improved slightly. Activity in industries providing services for the enterprise sector remains low. A number of enterprises in the regional network report plans for investments that will contribute to rationalisation.

The low pay increases in this year's wage settlement may indicate that the social partners are placing increased emphasis on the effects of pay increases on future developments in interest rates, the krone exchange rate and employment. In the light of experience from 2002, it must be assumed that government agencies will be more cautious in future wage settlements. The labour market outlook underpins expectations of moderate wage growth.

Improved profitability and a weaker krone are enhancing the competitiveness of internationally exposed enterprises, but competitiveness is substantially weaker than in the 1990s. Business sector investment is influenced by the high number of vacant business premises, and business sector demand for loans is stagnating.

Surveys conducted by TNS Gallup indicate that economic agents expect low wage and price inflation for a period ahead. Inflation of approximately 2½ per cent is expected in the longer term. Nor do bond yields provide any indication that inflation expectations will deviate from the target for inflation over time.

It has been appropriate to cut interest rates markedly this year because growth in the Norwegian economy is low. Interest rate reductions have been important in preventing inflation expectations from taking hold at too low a level.

Developments in the Norwegian economy in recent months have been approximately as projected in the June 2003 Inflation Report.

According to Norges Bank's assessment, with a sight deposit rate of 2.5 per cent, the probability that inflation two years ahead will be higher than 2½ per cent is now the same as the probability that it will be lower.

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

International economy (201 kB)

Financial markets (323 kB)

Demand and output (78 kB)

The labour market (69 kB)

Prices (78 kB)