The objective of monetary policy is a stable krone exchange rate against European currencies, which since the beginning of the year has been defined as stability against the euro. Price and cost inflation must therefore be reduced to the level aimed at by euro countries. At the same time, it must be ensured that monetary policy itself does not contribute to deflationary recessions.

Together with its continuous evaluation of the outlook for price and cost inflation and conditions in money and foreign exchange markets, the analyses in Norges Bank's inflation reports provide the basis for decisions regarding the orientation of monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented in the June Inflation Report.

"Norges Bank's assessment of the overall picture of economic developments remains the same as that presented in the June Inflation Report", says Governor Svein Gjedrem.

"Growth in the mainland economy is expected to be subdued both in 1999 and 2000 following several years of strong expansion. Developments in imports indicate a substantial decline in investment. Private consumption is expanding, but probably at a slightly lower rate than expected. The rise in the consumer price index has slowed in recent months. Price and cost inflation is expected to be gradually reduced to the level aimed at by euro countries.

"On the other hand, growth in the labour force has been considerably reduced. Pressures in the labour market therefore seem to be receding at a somewhat slower pace than assumed earlier. Furthermore, house prices have continued to rise faster than expected. The demand for credit remains high. The prospects for our trading partners have improved, as reflected in higher exports from mainland enterprises. The decline in international commodity and producer prices appears to have come to a halt.

"In the first half of 1999 Norges Bank reduced its deposit and lending rates in four steps by a total of 2.0 percentage points. If economic developments are approximately as envisaged in the Inflation Report, this should provide a basis for further interest rate reductions. The pace of the reduction in interest rates will in that case be more moderate than in the first half of the year", states Governor Gjedrem.