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 in the September Inflation Report.

Norges Bank expects price and wage inflation to edge down over time towards the level aimed at by the euro area. After expanding sharply since 1992, the Norwegian economy is now experiencing a period of weaker growth. Mainland economic growth is expected to be slower than growth in the production potential both this year and next, with some reduction in labour market pressures among other things. This is probably also necessary in order to ensure that price and cost inflation do not exceed the level in the euro countries. Developments indicate that growth in the mainland economy will be moving back towards trend growth in 2001.

Norges Bank's projections for the economy are based on a number of key assumptions concerning interest rates, the exchange rate and fiscal policy. In the September Inflation Report it is assumed that money market rates will shadow market expectations, as indicated by forward rates. The krone exchange rate is assumed to be NOK 8.30 against the euro. The projections are based on real public expenditure growth of about 2 per cent over the next two years.

Developments since the publication of the September report do not indicate a need to revise forecasts substantially. The general picture presented in this report remains valid.

The Government's budget proposal is broadly in line with the assumptions underlying Norges Bank's projections in its September Inflation Report

The krone exchange rate has varied between NOK 8.17 and 8.37 against the euro. Long-term rates have edged up, but this primarily reflects international conditions.

The year-on-year rise in the consumer price index was 2.1 per cent in September. The underlying rise in prices, excluding changes in indirect taxes and electricity prices, was also 2.1 per cent in September.

Domestic credit growth remains high, and house prices have increased. Developments in the labour market over the past month have been as expected. Traditional merchandise imports have decreased more than anticipated, however, indicating that there may be a greater decline in fixed investment in 1999 than forecast in the September Inflation Report.

So far this year Norges Bank has reduced its deposit and lending rates in five steps, by a total of 2.5 percentage points. If economic developments are approximately as envisaged in the September Inflation Report, there will be little room for further interest rate reductions. However, there is still a greater probability that the next change will be a reduction rather than an increase.