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 the orientation of monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 16 September in the September 1999 Inflation Report.

Developments since the publication of the September report do not provide a basis for revising our assessments. The overall picture of slower growth in the mainland economy in 1999 and next year, thereby reducing pressures in the labour market, remains the same. This will contribute to a gradual reduction in wage and price inflation.

Internationally, there has been a rise in key rates in the euro area, the UK, Denmark, Sweden, the US and Canada. This reduces the risk that stronger economic growth in Europe, among others, will lead to higher price inflation. Long-term interest rates have fallen, both internationally and in Norway.

The year-on-year rise in the consumer price index was 2.5 per cent in October. The underlying 12-month rise in prices, excluding changes in indirect taxes and electricity prices, was 2.3 per cent in October. Consumer price inflation has fluctuated slightly in recent months. Developments so far are consistent with Norges Bank's projection of 2¼ per cent for 1999.

The decline in imports confirms a sluggish trend in domestic demand. Private consumption is also increasing at a slightly slower-than-expected rate. Manufacturing employment is expected to fall next year as a result of reduced investment and higher wage costs.

On the other hand, the prospects for higher growth internationally are more favourable. In the public sector and parts of the sheltered sector the labour market is expected to remain tight. Labour reserves are almost exhausted. Domestic credit growth remains buoyant.

Norges Bank has reduced its deposit and lending rates by 2.5 percentage points in 1999. In the light of developments indicated by our analyses, the room for possible further interest rate reductionsn is limited. The distribution of risks in our analysis appears to be relatively balanced.

The dates for meetings of Norges Bank's Executive Board and for the publication of Inflation Reports for the first half of 2000 are available on the Bank's web pages.

Norges Bank has today notified the banks about its liquidity policy in connection with the turn of the year. Interest rate movements indicate that fears of unrest in financial markets around the turn of the year have subsided. Under all circumstances, however, Norges Bank will supply sufficient liquidity and take into account that the redistribution of liquidity between banks may not function as well as usual. Norges Bank will auction instruments to supply liquidity both before the Christmas weekend and between Christmas and New Year, with maturity in the second week of January. A plan specifying instruments and maturities will be published around mid-December.

(Note: Corrected translation of the third last paragraph compared to the first version published)