When Norges Bank concludes that the key rate should be changed, the change will in most cases be made gradually. This is because there is normally uncertainty about the situation in the economy, potential disturbances to the economy and how fast an interest rate change will affect price inflation. But we will not always take a gradualist approach. A rapid and pronounced change in the interest rate is appropriate if, for example, heightening turbulence in financial markets or a cost-push shock  2  BIS Review 51/2001  resulting from negotiations indicates that confidence in monetary policy is in jeopardy. And should there be prospects of a deflationary recession, it would be appropriate to apply our instruments more firmly. If special circumstances prompt Norges Bank to apply a different time horizon than two years, the Bank will provide an assessment of this. The same applies if special emphasis is placed on developments in financial markets or property markets. In the long run, inflation is determined by developments in domestic costs, productivity growth and imported inflation. A special feature of wage formation in Norway has been that conditions for exposed industries have received considerable emphasis in the wage negotiations, including the negotiations for industries that do not face international competition. During the last few years, the sheltered sector has had greater influence on overall wage developments. The centralised income settlements in Norway have been an arena of coordination, where macroeconomic considerations have at times received considerable emphasis. This has contributed to maintaining low unemployment.

Monitoring the European Central Bank 3 ". CEPR London 2001 and Lars E. O. Svensson: Independent Review of the Operation of Monetary Policy in New Zealand: Report to the Minister of Finance. February 2001. BIS Review 51/2001  In Norges Bank, we have used both an unchanged interest rate and an interest rate scenario based on market expectations in our inflation reports. If Norges Bank projects price inflation as higher or lower than 2½ per cent, it is an indication that the Bank envisages an interest rate path that is higher or lower than the path on which the projection is based. There is uncertainty associated with all forecasts. This very uncertainty and the central bank’s assessment of the various risk factors constitute important supplementary information. In our Inflation Reports, the uncertainty associated with the projections is discussed explicitly. An account is given of which variables Norges Bank regards as particularly uncertain, which way this uncertainty points, and how a different scenario could influence price projections. In addition, a fan chart illustrating the uncertainty of the projections is presented. Calculations based on alternative assumptions are presented regularly. This illustrates the isolated effect on price inflation of changes in assumptions. It provides insight into the effect on price inflation of potential disturbances to the economy. We base our analyses and assessments of the inflation outlook and balance of risks on models. The RIMINI macroeconomic model, developed in Norges Bank’s Research Department, has been an important tool for the Bank’s analyses since 1994.