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 will normally be made gradually. The analyses in Norges Bank’s Inflation Reports, 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 last Inflation Report, published on 31 October 2001, consumer price inflation two years ahead, with interest rates unchanged at 7 per cent, was estimated at 2½ per cent. The Inflation Report indicated that there was uncertainty surrounding the inflation projection. On the whole, the Bank’s assessment was that the probability that inflation two years ahead would be lower than 2½ per cent is greater than the probability that it would be higher.

At the last monetary policy meeting, the interest rate was reduced by 0.5 percentage point. Our assessment of the balance of risks was unchanged.

The Norwegian krone has appreciated somewhat since the last monetary policy meeting. The price of oil has remained between USD 18 and USD 20 per barrel. The price of oil futures has remained stable at around USD 20 per barrel. Consumer prices rose somewhat more than expected in December. Adjusted for changes in real taxes and energy prices, consumer prices rose by 2.7 per cent in the twelve-month period to December.

The risk of a deep recession in the world economy now appears to have diminished. There is considerable uncertainty surrounding both the timing and the scale of a recovery. Developments in Japan are highly uncertain. International producer prices have declined markedly.

Foreign trade figures for the fourth quarter of 2001 indicate that the reduction in export volumes may have come to a halt, while export prices continue to fall. Consumption indicators suggest strong growth in private consumption. It appears that house prices will remain high. Credit growth is still high. Household borrowing has increased, while growth in enterprise borrowing has slowed. The Norwegian Petroleum Directorate has revised upwards its projections of petroleum investment in the years ahead. Unemployment has risen somewhat, especially in the counties of Oslo and Akershus.

According to Norges Bank’s assessment, with an unchanged interest rate ahead, 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.