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 decisions concerning the key interest rate. In the Inflation Report presented today, consumer price inflation two years ahead, with an unchanged interest rate, is projected at 2½ per cent. The risks to the projections are considered to be balanced.

Inflation was somewhat higher than expected over the summer, but edged down in August and September. A strong krone and falling prices for imported consumer goods have pushed down consumer price inflation over the last two months in spite of sharp growth in labour costs in Norway. Adjusted for tax changes and excluding energy products, the year-on-year rise in consumer prices was 2.2 per cent in September.

Developments in the global economy have been weak through the summer and autumn. Both in the US and Europe, economic growth has stagnated following strong growth at the beginning of the year. Equity prices have exhibited a sharp fall in the period to October. Growth in the world economy is still expected to pick up, but the strength of the recovery is now expected to be weaker than assumed earlier. Developments in investment could be decisive for how strong the recovery will be. Considerable idle capacity in several sectors suggests that it may take time for investment to show a pronounced rebound.

The growth projections for the Norwegian economy have been revised downwards somewhat on the July Inflation Report, primarily as a result of the interest rate increase in July, weaker international developments and a stronger krone. Earnings at enterprises exposed to foreign or domestic competition may decline as a result of weaker competitiveness and sluggish growth in the world economy. On the other hand, oil prices are high. This is generating solid revenues for the petroleum sector and the state.

The sharp rise in labour costs may also have an impact on the level of activity in enterprises that are normally sheltered from foreign competition, and in public enterprises. Employment growth may thus be moderate in the period ahead and unemployment may edge up.

The government budget proposal for 2003 shows underlying expenditure growth of 4.5 per cent, with real spending growth estimated at 0.5 per cent. The effects of the budget proposal on aggregate demand are projected to be mildly positive. The forecasts for developments in the Government Petroleum Fund and for the use of petroleum revenues have been revised downwards appreciably for the years ahead.

Norwegian households are generally optimistic about the outlook for their financial situation. They are borrowing heavily and house prices are high. Private consumption appears to be growing at a fast pace.

The effective krone exchange rate is 2½ per cent stronger and the import-weighted krone exchange rate close to 4 per cent stronger than assumed in the July report. The appreciation of the krone will translate into a fall in imported goods over the next few years. This will offset the inflationary impulses from the strong growth in wages. Inflation will probably fall to less than 2 per cent next spring. As the effects of the appreciation of the krone gradually unwind, it is likely that the high level of wage growth will again start to dominate and inflation to rise.

In the work on this Inflation Report we have used information from the regional network that we established this autumn. We will have six rounds of talks with business and community leaders about financial developments in their enterprises and industries, with around 200 visits in each round. We have divided the country into 7 regions, and in 6 we have established contacts with regional research institutes that are responsible for the contact meetings on behalf of Norges Bank.

I would also like to mention that the Executive Board of Norges Bank has decided to release the strategy document that is prepared in connection with the work on the Inflation Report. The document discusses the consequences of the projections for interest-rate setting in the period ahead. The strategy document will be released four months after the document has been approved by the Executive Board.