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 euro area countries. At the same time, monetary policy must not in itself 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 concerning monetary policy instruments. Norges Bank's assessment of the economic outlook was last presented on 16 December in the December 1999 Inflation Report. These analyses indicate that over time price inflation will be reduced to the level aimed at by the euro area countries. Projections reflect that pressures in the labour market will ease, resulting in lower wage inflation in 2000 and 2001 than in 1999. There seems to be little risk of a pronounced downturn.

Throughout February the krone exchange rate against the euro has been slightly stronger than in January. The krone has weakened against both the US dollar and pound sterling. Measured against the trade-weighted index, the krone has been stable. Key rates have been raised in many countries. The ECB and the central banks in the US, the UK, Sweden, Denmark, Switzerland, Canada, New Zealand, Australia and Hong Kong have raised their key rates by ¼-½ percentage point. Long-term interest rates have edged down both internationally and in the Norwegian market.

Consumer price inflation was 2.9 per cent in January. Price inflation has slightly exceeded expectations in recent months. This is partly due to temporary and random factors. House prices are still rising. Credit growth remains strong. Quarterly national accounts for the fourth quarter of 1999 indicate that economic growth picked up in the last half of 1999. The growth rate of the Norwegian economy at the beginning of 2000 may therefore have been somewhat higher than projected in the December Inflation Report. There are also signs of stronger economic growth internationally.

On the other hand, a number of developments still confirm the anticipated slowdown in the Norwegian economy. Unemployment is edging up and petroleum investment is declining. Imports are moving on a weak trend. Signs of low earnings in the enterprise sector may contribute to restraining fixed investment. It is also uncertain how high oil prices will affect international developments.

New data received since the December Inflation Report point to stronger growth internationally and in Norway than projected in the December report.

Norges Bank has left interest rates unchanged since September last year. As we judge the risks at present, the probability that the next change in interest rates will be a reduction is equal to the probability that it will be an increase.