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 continuous evaluation 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 is projected at 2¾ per cent in 2000 and 2 per cent in 2001. For 2002, the rate of increase in consumer prices is estimated at 2¼ per cent. Mainland GDP is projected to expand by 1½ per cent in 2000 and 2 per cent in 2001. In 2002, growth is expected to be broadly in line with trend growth of 2¼ per cent.

The krone exchange rate against the euro has been relatively stable since the beginning of the year. However, the krone has recently depreciated against the US dollar, pound sterling and the Swedish krona in particular. This has contributed to a weakening of the trade-weighted index of a good 2 per cent since the beginning of the year. Short-term interest rates have been edging up both in Norway and other countries. Since the last change in Norges Bank's interest rates, key rates have been raised in many countries. Market participants expect several central banks to raise interest rates in the period ahead.

Developments both internationally and in Norway underline the picture described in the last Inflation Report. Economic developments among our trading partners are favourable. This will provide an impetus to Norwegian exports, which are expanding at a rapid pace.

Consumer prices in Norway rose by 2.5 per cent in the twelve months to March, which was broadly in line with expectations. Underlying price inflation, excluding electricity prices and indirect tax changes and adjusted for the changeover to a monthly house rent index, was 2.4 per cent. The recommended proposal for employees covered by the Norwegian Confederation of Trade Unions and the Confederation of Norwegian Business and Industry implies a level of cost inflation in line with the projection in the Inflation Report. Short-term statistics show that private consumption is increasing. House prices are still rising. Growth in credit to households remains high.

On the other hand, petroleum investment is expected to contract this year. Weak corporate profitability may contribute to restraining mainland fixed investment. In addition, there has recently been a correction in stock markets after a sustained period of sharp gains in equity prices.

There seems to be little risk of a downturn in the economy. In the light of recent trends in the economy and the balance of risks, the probability that the next change in interest rates will be an increase is greater than the probability of a reduction.