The objective of monetary policy is stability in the exchange rate against European currencies. When setting interest rates, the central bank places emphasis on the fundamental preconditions for exchange rate stability. Price and cost inflation must over time be reduced to the level aimed at by the euro area. At the same time, monetary policy must not in itself contribute to deflationary recessions.

The analyses in Norges Bank's inflation reports, together with a regular assessment of the outlook for price and cost inflation and conditions in money and foreign exchange markets, provide a basis for decisions regarding monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 23 March in the March 2000 Inflation Report.

In the report, consumer price inflation was projected at 2¾ per cent in 2000 and 2 per cent in 2001. For 2002, the rate of increase in consumer prices was estimated at 2¼ per cent. Mainland GDP was projected to expand by 1½ per cent in 2000, 2 per cent in 2001 and 2¼ per cent in 2002.

The krone exchange rate against the euro has been relatively stable. The krone has depreciated against the US dollar, pound sterling and the Swedish krona. The effective krone exchange rate has depreciated by a little more than 4 per cent since the beginning of the year. Short-term interest rates have risen both in Norway and other countries. A number of central banks have raised their key rates.

The outcome of the wage negotiations in the private sector points to a somewhat stronger increase in the cost of labour in 2000 and 2001 compared with the estimates in the March Inflation Report. However, there is still considerable uncertainty concerning wage developments, notably with regard to wage growth in the public sector and wage drift in the private sector.

Consumer prices in Norway rose by 2.6 per cent in the twelve months to April. Underlying price inflation, which excludes electricity prices, indirect tax changes and adjusts for the changeover to a monthly house rent index, was 2.3 per cent.

Economic developments among our trading partners are favourable. This is generating an impetus to Norwegian exports, which are expanding at a rapid pace. Short-term statistics indicate that domestic demand remains buoyant. Unemployment remains low. House prices are still rising. Growth in credit to households has increased and private consumption is growing sharply. On the other hand, petroleum investment is expected to contract this year. Growth in credit to the enterprise sector is declining. Commercial property prices are rising slowly. There are no signs of renewed growth in business investment. However, there is little risk of a downturn in the economy as a whole in the short term.

Norges Bank raised its key rates by 0.25 percentage point one month ago. In the light of recent trends in economic developments and in the balance of risks, the probability that the next change in interest rates will be an increase is currently greater than the probability of a reduction.