The objective of monetary policy is stability in the exchange rate against European currencies. Norges Bank does not have the instruments to fine-tune the exchange rate, but 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 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 monetary policy instruments. Norges Bank's assessment of prospects for economic developments was last presented on 22 June in the June 2000 Inflation Report.

Norway's trading partners are still experiencing robust economic growth, but high oil prices may gradually moderate the expansion. The prospect of higher price inflation has led to an increase in interest rates in EMU countries and subsequently Denmark. Market participants expect key rates to be raised in the euro area and some other European countries.

The krone exchange rate has appreciated somewhat against the euro since Norges Bank's Executive Board held its monetary policy meeting on 9 August. The effective krone exchange rate, which is a better indicator of international price impulses to the Norwegian economy, has also appreciated somewhat, but less than the krone exchange rate against the euro. The effective krone exchange rate is still weaker than at the beginning of the year.

Price inflation has increased. The year-on-year rate of increase in consumer prices was 3.5 per cent in August. Underlying price inflation, ie excluding indirect taxes and changes in electricity prices and adjusted for the revision of the house rent index, stood at 3.1 per cent in August, up from 2.4 per cent in January this year. Increases in petrol prices have been a contributing factor.

The labour market is tight. Employment growth has been higher than expected. Unemployment is now at approximately the same level as in the first part of 1999. The economy has shown renewed growth, following a pause from summer 1998 to summer 1999. Traditional merchandise imports are rising, and housing investment has picked up. Private consumption is expanding, buoyed by strong credit growth and high house prices. The latest figures on private consumption indicate, however, that growth may slow somewhat. The interest rate increases so far this year will gradually contribute to curbing the rise in demand and prices.

The September 2000 Inflation Report is currently being prepared and will be presented in one week. There seems to be little risk of a downturn in the economy. It appears that price inflation in 2001 may be somewhat higher than projected in June, primarily as a result of a high oil price. Price and cost inflation may slow somewhat in the period ahead, and the rate of increase in prices in 2002 may be lower than projected in June. This is partly based on the assumption of a neutral fiscal policy. In the light of recent trends in the economy and the current balance of risks, the probability that the next change in interest rates will be a reduction is the same as the probability of an increase.