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 be brought down towards the corresponding aim for inflation in 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 concerning monetary policy instruments. Norges Bank’s assessment of prospects for economic developments was last presented on 21 December 2000.

The projections in the December 2000 Inflation Report indicate that price and cost inflation in Norway will gradually slow. Given approximately unchanged interest rates, the projection for price inflation is a little less than 2 per cent from the end of 2002.

The effective import-weighted krone exchange rate has shown little change since the previous monetary policy meeting, but is somewhat weaker than it was a year ago. Measured against the euro, the krone has remained virtually unchanged since the previous monetary policy meeting.

World economic growth appears to be somewhat slower than assumed in the previous Inflation Report. Developments in the global economy are uncertain. The Federal Reserve reduced the federal funds rate by a total of 1 percentage point in January. Key rates have also been lowered in other countries.

New information since the December 2000 Inflation Report does not provide a basis for a substantial change in the assessment of developments in the Norwegian economy. Quarterly national accounts indicate somewhat lower growth in household demand than expected in the second half of 2000. On the other hand, capacity utilisation in the Norwegian economy remains high. The labour market is tight. There appears to be somewhat greater optimism in the manufacturing sector. New information points to higher-than-expected petroleum investment. Price inflation is high. The year-on-year rise in the consumer price index was 3.4 per cent in January. Underlying price inflation, i.e. price inflation excluding indirect taxes, electricity and petrol prices, was 2.8 per cent. House prices may have risen again in January after a decline towards the end of 2000. Credit supply remains high, although the growth rate slowed somewhat in December.

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.