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 its assessment today, the Executive Board placed particular emphasis on the following factors:

Inflation, as measured by the CPI-ATE, was 2.3 per cent in 2002. In recent months, inflation has been lower. The year-on-year rise was 1.8 per cent in January. Inflation is expected to be low in the period to the summer. Subsequently, inflation will depend on developments in wages, the exchange rate and the interest rate. The strong krone is the main factor behind low price inflation. The rise in prices for domestically produced goods and services is marked by the considerably higher level of wage growth in Norway relative to trading partners.

As a result of higher electricity prices, the overall rise in prices was particularly high in January. This is a temporary effect that does not have a direct bearing on the interest rate.

The world economy is in the doldrums. There are fears of recession in major economies such as the US, Germany and France. The outlook for the Japanese economy is weak. We still expect global growth to pick up gradually towards a more normal level, but the upturn may come at a later stage than previously assumed. The situation is highly uncertain, and we cannot rule out that the world economy is headed for a fairly long period of stagnation. Stagnation in the world economy will also contribute to lower growth in the Norwegian economy.

Owing to fears of war and low oil reserves, particularly in the US, oil prices are hovering above USD 30 per barrel. Moreover, there is little idle capacity in several important OPEC countries. In the short term, this will hold up oil prices, but developments in the world economy may lead to a subsequent fall in prices.

The Inflation Report published today presents two alternative paths for the Norwegian economy. In the baseline scenario, where the interest rate is held constant at 5½ per cent and the krone exchange rate at the average for the past month, inflation is projected to remain below 2½ per cent over the forecast horizon. In an alternative scenario, where monetary policy is eased in line with market expectations, inflation may be somewhat higher than target at the two-year horizon. There is uncertainty associated with developments in many of the factors that will influence inflation ahead, among others the exchange rate. This implies a gradual approach in the conduct of monetary policy.

Unemployment has edged up in recent months. There is growing pessimism in manufacturing industry. In spite of the recent depreciation of the krone, profitability remains weak. The full effects of the high cost level have still not come into evidence in the business sector. Since decisions have already been made to close down or relocate some businesses, private sector employment will show a further decline. High wage growth has also reduced demand for labour in the public sector.

Our regional network reports that problems in export-oriented industries are spreading to enterprises that supply goods to the domestic market. Many companies are seeking to sustain profitability by cutting costs, e.g. by reducing their workforces. Reports from the health sector and local government sector point to stagnating or falling employment. On the other hand, employment in retail trade and other sectors that sell services to households is stable or showing moderate growth.

The high level of wage growth is, in isolation, holding up inflation in Norway. Annual wage growth will remain high this year because of the pay increases that have already been awarded. The projections for wage growth have been revised downwards in both scenarios in the Inflation Report, partly reflecting a weaker economic outlook.

Household income growth is expected to slow this year and next as a result of weak employment developments and lower wage growth. The sharp rise in electricity prices has reduced real disposable income. Increased uncertainty in the labour market will make households more cautious. The interest rate reductions this winter will stimulate household demand in the period ahead and curb the negative effects of higher electricity prices and increased uncertainty. Private consumption may, nevertheless, show weaker growth this year than projected earlier.

On balance, these developments point to low inflation in the period ahead. Norges Bank judges that, with an interest rate of 5.5 per cent, the probability that inflation two years ahead will be lower than 2½ per cent is greater than the probability that it will be higher.

I would also like to draw your attention to some new features in this issue, and subsequent issues, of the Inflation Report. The Report has been expanded to include a summary and a more extensive presentation of monetary policy. The Strategy Document for the period November 2002 to March 2003 is included in a separate annex. In addition, the Report includes a summary of the reports from our regional network.

Charts used in connection with the Executive Board's monetary policy meeting:

The global economy (182 kB)

Financial markets (295 kB)

Demand and output (94 kB)

The labour market (94 kB)

Prices (103 kB)