The objective of monetary policy is a stable krone exchange rate against European currencies, defined since the beginning of the year as the euro. Norges Bank does not have the instruments to fine-tune the krone exchange rate. In its orientation of instruments, the central bank places emphasis on the fundamental preconditions for exchange rate stability over time. 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.

The analyses in Norges Bank's inflation reports, together with its continuous evaluation of the outlook for price and cost inflation and conditions in money and foreign exchange markets, provide the basis for decisions regarding monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 16 December in the December 1999 Inflation Report.

The krone exchange rate against the euro has strengthened slightly over the past month, varying between NOK 8.07 and NOK 8.14 per euro. Measured against the trade-weighted index, the krone has been stable. Long-term interest rates are approximately unchanged. Consumer price inflation was 2.8 per cent in the twelve months to November, boosted by rising electricity prices. The underlying rise in prices, which excludes changes in electricity prices and indirect taxes, showed a year-on-year increase of 2.5 per cent. Credit and money supply growth has picked up slightly in the past two months. The high growth rate may be related to increased demand for liquidity in connection with the turn of the year.

Preliminary quarterly national accounts figures suggest that growth in the third quarter was slightly higher than previously expected. In particular, fixed investment and consumption by the service industries boosted growth, whereas developments in manufacturing pushed the growth rate down.

Norges Bank's estimates in the December Inflation Report indicate that the decline in mainland growth in the time ahead will be slightly less than expected earlier this year. From 2002, growth appears set to rise to the growth level of the production potential of the economy. There also appears to be less risk now of a pronounced decline than was the case when the previous Inflation Report was presented. The various sectors of the economy are expected to have different growth rates, with a decline in manufacturing, but continued growth in parts of the sheltered sector. Wage growth estimates remain unchanged from those in the September report.

The analyses in the Inflation Report indicate that over the next two years price inflation will be reduced to the level aimed at by the euro countries.

Norges Bank has reduced its deposit and lending rates by a total of 2.5 percentage points in 1999. In the light of developments indicated by our analyses, interest rates now appear to be at or close to the trough in this business cycle.