The operational objective of monetary policy is low and stable inflation. The Government has set the inflation target 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.

In Norges Bank's last Inflation Report of 27 February, the rise in consumer prices two years ahead, with unchanged interest rates, was estimated at 2½ per cent. In the report we pointed to the uncertainty associated with global economic developments and indicated that import price inflation may pick up at a later stage than anticipated. At the same time, there was a risk that wage growth would be higher than projected. Overall, we considered both then and at the previous monetary policy meeting on 10 April that the risks to the inflation projection were balanced.

Global economic growth is picking up, following sluggish developments through 2001. Growth in the US in the fourth quarter of 2001 and the first quarter of this year was stronger than expected. Higher defence expenditure, reduced taxes and low interest rates have been contributing factors, but it is uncertain whether the recovery has taken hold. It appears that growth in the euro area will be moderate. The Japanese economy is still in a difficult situation, but the decline in industrial output appears to have come to a halt. A high oil price could dampen the global upturn and lead to higher inflation. Prices have risen more than expected in the euro area. On balance, it appears that growth among our trading partners will be somewhat stronger and price inflation somewhat higher than estimated in the February Inflation Report.

The labour market in Norway is tight, with high wage growth. So far, those of this year's wage settlements that have been concluded since the last monetary policy meeting point to higher-than-projected wage growth. Different pay increases for different groups of employees may lay the basis for a new wage-wage spiral.

The rise in wages is contributing to higher growth in household disposable income and to higher private consumption. Current statistics also point to strong consumption growth. House prices remain buoyant, and household borrowing is extensive. Petroleum sector income is high. Other sectors of the domestic economy have developed approximately as expected. In this year's Revised National Budget, the Government has adhered closely to the fiscal guideline.

Consumer price inflation adjusted for tax changes and excluding energy products was 2.4 per cent in the twelve months to April this year. Price inflation is approximately as projected by Norges Bank.

The krone exchange rate has continued to appreciate against other currencies. The effective krone exchange rate is now 4½ per cent stronger than the rate assumed in the February Inflation Report. In isolation this points to lower inflation.

Nevertheless, according to Norges Bank's assessment of the risks associated with the inflation outlook, the appreciation of the krone cannot fully counteract stronger wage growth, faster growth in consumption, a higher oil price and a somewhat more favourable global economic outlook.