Our ambition must be to reduce uncertainty with regard to our own response pattern. That actual interest rate developments will deviate somewhat from Norges Bank's forecast must be expected to be the rule rather than the exception. We therefore also attempt to shed light on the uncertainty surrounding these variables. The charts show the interest rate projection in the latest Inflation Report. The uncertainty is illustrated in a fan chart. The wider the fan chart is, the more uncertain the forecast. The uncertainty implies that the interest rate should normally be changed gradually, so that we can assess the effects of interest rate changes and other new information about economic developments. Changes in forecasts are nothing new to financial market participants, who frequently change their expectations concerning future interest rates as the economy is exposed to disturbances. The deviation between market expectations and the actual interest rate has been substantial in periods. There is no reason to believe that Norges Bank will not also have to reassess its interest rate forecasts as new information emerges about economic developments. The current economic situation Allow me to move on from a more general presentation of monetary policy to a closer look at the current economic situation and monetary policy assessments. Since the marked deceleration of consumer price inflation as from 2003, monetary policy in Norway has been oriented towards bringing inflation up towards the target of 2.5 per cent. The low interest rate level has contributed to substantial growth in demand for goods and services.

As a result of the high level of earnings and fluctuations in these petroleum revenues, the most important contribution fiscal policy can make to stabilising the Norwegian economy is to provide a sound, longterm strategy for the use of petroleum revenues. In other words, fiscal policy is subject to the fiscal rule. Attempts to use the central government budget to fine-tune economic activity may have a destabilising effect if these attempts are perceived as a breach of the long-term strategy for the phasing in of petroleum revenues. As a general rule, central banks influence the shortest money market rates via the policy rate. However, economic agents’ consumption and investment decisions depend more on their interest rate expectations. Hence, monetary policy functions primarily by influencing expectations regarding future interest rates. Economic agents therefore need to understand the central bank’s intentions in its interest-rate setting. In the November 2005 Inflation Report, Norges Bank published its own projection for the interest rate for the first time. The aim is to enhance the predictability of monetary policy. With a predictable monetary policy, market participants can react to new information in a way that contributes to stabilising developments in output and inflation. So far, the Reserve Bank of New Zealand is the only other central bank that has experience in publishing its own interest rate projections. Most central banks that publish projections base their forecasts for developments in the economy on either a constant interest rate or on the assumption that the interest rate will shadow market interest rate expectations.