The objective of monetary policy is low and stable inflation. The inflation target is set at 2½ per cent. The key interest rate is set on the basis of an overall assessment of the inflation outlook, normally two years ahead. Changes in the interest rate are normally made gradually. The analyses in Norges Bank’s Inflation Report, together with the Bank’s current assessment of the outlook for price and cost inflation and developments in the money market and foreign exchange market, provide a basis for decisions concerning monetary policy instruments. In Norges Bank’s October Inflation Report, the rise in consumer prices two years ahead, with unchanged interest rates, was estimated at 2½ percent. The Inflation Report indicated that there is uncertainty surrounding the inflation projection. All in all, the Bank’s assessment was that the probability that inflation two years ahead will be lower than 2½ per cent is greater than the probability that it will be higher.

International economic developments are marked by a synchronised downturn in the US, Japan and Europe. Central banks in a number of countries have reduced their key rates. In the US, the UK and Sweden, taxes have been lowered and public expenditures increased to stimulate the economy. The most likely scenario is that economic policy will contribute to a resumption of growth next year. However, there is still a risk of a deep, more prolonged downturn in the global economy. This would lead to weaker economic developments and lower-than-estimated price inflation, also in Norway. In addition, the oil market is unstable with a tendency towards lower prices.

Some sectors of Norwegian industry are now experiencing falling demand in export markets. The position of Norwegian enterprises has also weakened due to substantial cost increases in recent years. Unemployment has edged up. On the other hand, household finances are solid. Credit growth to the household sector is still strong. It appears that house prices will remain high. Consumer prices, excluding changes in excise duties and energy prices, rose by 2.5 per cent in the twelve-month period to November. Real wage growth and tax reductions indicate that consumption growth will continue.

According to Norges Bank’s assessment, with an interest rate of 6.5 per cent, the probability that inflation two years ahead will be lower than 2½ per cent is still greater than the probability that it will be higher.