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.

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 interest rate decisions. In the Inflation Report that is being presented today, the rise in consumer prices two years ahead, with unchanged interest rates, is estimated at 2½ per cent.

Since the last monetary policy meeting on 23 January, the krone has appreciated. In isolation this points to lower inflation. On the other hand, retail sales have increased. Households are now more optimistic about the outlook for their own financial situation. House prices are still rising and household borrowing remains at a high level. The rise in unemployment towards the end of last year levelled off in January. In 2001, wage growth proved to be somewhat higher than expected. Oil prices have been fairly stable at around USD 20 per barrel.

Tax changes have a significant impact on consumer price developments, and the consumer price index rose by only 1.3 per cent from January 2001 to January 2002. Adjusted for tax changes and excluding energy products, price inflation was 2.5 per cent.

Since the last Inflation Report, which was published at the end of October, there have been some signs of an early recovery in the US economy. As in the last report, demand is expected to pick up through the year both in the US and Europe. The recession in Japan appears to be continuing. International producer prices have declined and consumer price inflation is falling. Our assessment of uncertainty has changed. The risk of a deep and prolonged recession is somewhat reduced, but there is still substantial uncertainty and it is too early to establish whether a renewed upswing has taken hold. As in the previous report, prices for imported goods are expected to fall this year. Recent developments in the krone exchange rate will also contribute to this. The increase in import prices is expected to pick up again through 2003.

During the autumn of 2001, enterprises in some industries in Norway started to feel the effects of a fall in prices and lower demand in export markets. Nevertheless, it appears that the overall effects of the global downturn on the activity level in Norway have been limited. The projections for petroleum investment have also been revised upwards for the years ahead. Household income is expected to show strong growth this year, partly as a result of lower direct and indirect taxes. Our projection for domestic demand has therefore been revised upwards. The risks surrounding this projection are considered to be balanced. Annual wage growth is projected at 5 per cent in the period ahead. If profitability in the manufacturing sector is of less importance than earlier and wage-wage spirals in sheltered sectors of greater importance, the nominal rise in labour costs will be higher.

According to Norges Bank’s overall assessment of the balance of risks, the probability that inflation two years ahead will be higher than 2½ per cent is the same as the probability that it will be lower.