clear evidence of strong confidence in low and stable inflation over time on the part of economic agents. gradually, as we gain experience with setting interest rates according to an inflation target, the possibilities for placing emphasis on stability in the real economy will probably increase. low and stable inflation is a necessary precondition for stability in the foreign exchange and financial market and the property market. however, there have also been episodes where bubbles have accumulated in these markets, in the form of sharp increases in asset prices, while inflation has been low. the situation in japan in the 1980s is an example. price increases in property and financial markets may have a considerable impact on wage growth and consumer price inflation after a period. when the bubbles burst, the result may be an economic downturn. in this way, developments in financial and property markets may be a source of a more unstable inflation environment. in principle, it would be appropriate to use the interest rate to counter this. in practice, however, it is difficult to assess whether price trends in property and financial markets are sustainable. 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 monetary policy credibility is threatened. if special circumstances prompt norges bank to apply a different time horizon than two years, the bank will provide an assessment of this. we will also do so if developments in financial markets or the property market warrant particular attention. the role of the krone exchange rate with the new operational target of monetary policy, norges bank will aim to maintain low and stable inflation. we no longer have a specific exchange rate target for the norwegian krone. nevertheless, developments in the krone exchange rate are still very important when norges bank sets the interest rate. this is due to a number of factors : • changes in the krone exchange rate affect prices measured in nok for imported consumer goods and services. bearing in mind that imported goods are used in norwegian production, the rise in prices for imported goods and services combined determines nearly 40 per cent of consumer price inflation. • developments in the krone exchange rate have an influence on the earnings of companies that compete with foreign enterprises and that traditionally also negotiate first in the income settlements. • changes

the macroeconomic outlook and our assumptions which constitute the basis for our forecasts. first, i will summarize the recent inflation developments, and then compare the short term forecasts in the october inflation report with the actual inflation data regarding the fourth quarter of 2011. there were a few developments in the interreporting period which led inflation to deviate significantly from october forecasts. more - than - envisaged increases in unprocessed food prices were an important cause of this deviation. the ongoing depreciation in the turkish lira amid the deterioration in the risk appetite was another factor leading to a deviation in short - term forecasts ( chart 8 ). bis central bankers ’ speeches chart 8. october 2011 inflation forecasts and realizations * shaded region indicates the 70 percent confidence interval for the forecast. owing to the lagged effects of the exchange rate pass - through, core inflation indicators remained at elevated levels during the final quarter ( chart 9 ). this mainly stemmed from soaring core goods prices, while the moderate course of the underlying trend of services inflation indicated a benign outlook in terms of second round effects ( chart 10 ). chart 9. chart 10. core inflation indicators sca - h and sca - i prices of core goods and services ( seasonally adjusted, 3 - month average, annual percent change ) source : turkstat, cbrt. ( seasonally adjusted, 3 - month average, annual percent change ) source : turkstat, cbrt. we see that economic activity remained robust in the second half of 2011, despite a slight deceleration. gross domestic product ( gdp ) data pointed that domestic demand proved stronger in the third quarter of 2011 compared to the outlook presented in the october inflation report ( chart 11 ). thus, we revised our output gap forecasts for this period upwards. growth composition became much more balanced as we expected ( chart 12 ). despite the weak course of the global economy, exports continued to increase, whereas the demand for imported goods and services maintained a downward trend. consequently, the contribution of net external demand to growth has been positive for the first time after a protracted period. bis central bankers ’ speeches chart 11. chart 12. final domestic demand exports and imports of goods and services ( seasonally adjusted, 2008q1 = 100 ) ( seasonally adjusted, 1998 prices, billion tl ) source : turkstat, cbrt. * estimate. source : turkstat, cbrt. indicators regarding the last quarter of 2011