restraining structural changes that occur when households increase their debt over several years to invest in housing and other property and assets. an interest rate that would effectively restrain these structural adjustments would also have an adverse impact on economic activity. but households are more vulnerable when debt levels are high. long periods of a sharp rise in asset prices and debt may give rise to instability in output and employment at a later stage. debt developments also affect banks ’ behaviour. a particular responsibility for monitoring developments in financial institutions has been assigned to kredittilsynet ( financial supervisory authority of norway ), and we are happy to have a well - equipped supervisory authority in this field. in its forecasting of economic variables, norges bank uses a broad approach. current statistics and impressions from norges bank regional network are important in assessing the current economic situation. in its forecasting, the bank uses several macroeconomic models : one core model and a number of smaller models. there is, however, no mechanical relationship between the models the bank uses and its forecasts. the bank ’ s forecasts are based on a broad and varied range of information sources and include a substantial element of judgment. important components in the assessment of what constitutes a good interest rate path – and which stress the element of judgment in this assessment – are expressed in a set of criteria that should be met. the criteria are included in the inflation report. criteria have been set for robustness and financial stability. it is also appropriate to assess interest - rate setting against cross - checks such as simple monetary policy rules. the central balance is nevertheless between the inflation outlook and the outlook for capacity utilisation in the economy, expressed in the chart as the output gap. the projections are from inflation report 3 / 05. if monetary policy is to anchor inflation at the target, the interest rate must be set so that inflation moves towards the target. inflation should be stabilised close to the target within a reasonable time horizon, normally 1 - 3 years. provided inflation expectations are on target, the inflation gap and the output gap should be in reasonable proportion to each other until they close. looking ahead, the inflation gap and the output gap should normally not be positive or negative at the same time. several of the recommendations from norges bank watch can be translated into how we should weigh the outlook for these two variables against each other. according to the report, norges bank ’ s inflation projections through 2005 were fairly accurate. inflation has risen somewhat but is still very low, even

, many international enterprises now have a poorer credit rating than earlier this has also affected borrowing in norwegian companies, which now have to place greater emphasis on their customers ’ ability to honour commitments. international financial and capital markets are characterised by uncertainty and unrest. this unrest is not found among economic agents in norway. as long as oil prices are high, the norwegian economy is fairly sheltered. many central banks are now reducing their key rates. as our economy is affected to a lesser extent, the differential between short rates in norway and abroad may widen. monetary policy the long - term objective of monetary policy is to provide the norwegian economy with a nominal anchor – domestic price stability, and thereby the basis for a stable krone. nominal stability is the best contribution monetary policy can make to economic growth and prosperity. a nominal anchor is also a necessary precondition for stable financial markets and property markets. high inflation and wide swings in the exchange rate impair the function of prices as an information vehicle. this leads to booms followed by busts and an arbitrary redistribution of income and wealth. inflation therefore poisons the economy. by linking movements in the krone to the euro, we have chosen to follow the same standard for nominal stability in the economy as set by the euro area countries. inflation 1990 - 2001 per cent norway euro area since 1997, inflation has been higher in norway than in the euro area. the difference partly reflects a period of strong growth in norway, while the level of activity in europe has been low. the higher level of inflation in norway cannot be sustained, however, as this would undermine the basis for stability in the krone exchange rate and confidence in monetary policy. short - term capital inflows and outflows are probably the most important factor determining movements in the krone exchange rate from day to day, from week to week and from one quarter to the next. they are governed by expectations concerning future returns. changes in expectations concerning the future value of the krone can trigger extensive capital movements. as a rule, norges bank does not intervene in foreign exchange markets with a view to influencing the krone exchange rate. the krone is floating, and the value of the krone fluctuates in periods by the same magnitude as exchange rates in other open economies. nevertheless, the prevailing stability of the krone is largely a reflection of confidence that inflation in norway will be kept at a low level. our experience is that changes in the norwegian interest rate level only have a predictable