report to the ministry of finance. this report carefully examines the reasons for the low level of inflation and the measures that have been implemented to bring inflation back up to target. there are still prospects of low inflation for some time ahead. developments in other countries indicate that prices for imported goods and services, measured in the producer countries ’ currencies, will not rise appreciably. it also takes time for the effects of last year ’ s appreciation of the krone to dissipate. however, this year ’ s krone depreciation will gradually have an affect on inflation and thus contribute to higher inflation. the analysis in the june inflation report showed that a reduction in the sight deposit rate towards 3 per cent, combined with some depreciation of the krone, could bring inflation up towards the target at the two - year horizon. the prospect of more moderate wage growth ahead could provide a basis for an even lower interest rate and a weaker krone without the projections for inflation exceeding 2. 5 per cent in the period. with reduced pressures in the economy and an inflation outlook that is below target at the two - year horizon, norges bank has reduced the key rate a number of times in the last year. this summer the interest rate has been reduced in larger steps than has been customary. interest rate reductions have been an important element in preventing inflation expectations from taking hold at too low a level. the reductions in the interest rate will also contribute to pushing up growth in the economy. there was a decline in mainland gdp this past winter. subsequently, it appears that growth has picked up somewhat, but investment activity in mainland norway is still low. investment in the petroleum sector is rising, but a large portion of the increase in demand is being met by imports. public consumption rose sharply in 2002, but the public sector is providing little stimulus to the economy this year. in spite of relatively high growth in nominal budget ceilings, high wage growth gives little room for increased activity. it is primarily private consumption that is making a positive contribution. more balanced growth might be desirable, but households have strengthened their financial position in recent years at the expense of private and public enterprises. therefore, these sectors ’ capacity to push up growth will be somewhat reduced in the period ahead. we expect that growth in private consumption will gradually contribute to higher employment and increased investment in mainland enterprises. the interest rate reductions will underpin these developments. growth in the global economy is also expected to accelerate and stimulate growth in norway.

developments in the period ahead may be somewhat greater than normal. if households assume that interest rates will remain low, private consumption may increase substantially, and the rise in house prices and household borrowing may again accelerate. the risk of stronger growth in household demand must be weighed against the sluggish developments in the business sector. despite the depreciation of the krone, enterprises ’ competitiveness is still rather weak after many years of high wage growth. vacancy rates for commercial premises are high and rents have fallen. another risk is that wage growth may accelerate again, as it did following the interest rate reductions in 1999. this risk is also being reduced by a slacker labour market. unemployment in 2004 will probably be on a par with the level in 1996 and 1997. annual wage growth in these years was a little less than 4½ per cent. the low pay increases in this year ’ s wage settlement may indicate that the social partners are now placing more weight on the negative effects of large pay increases on future developments in interest rates, the krone exchange rate and employment in contrast to what appeared to be the case in the past few years. in the light of experience from 2002, it must be assumed that public agencies will be more cautious in future wage settlements. the labour market outlook underpins expectations of moderate wage growth. developments in the krone exchange rate represent another source of uncertainty. the relationship between the krone exchange rate and the interest rate differential against other countries is not necessarily stable over time. themes in international financial markets change. however, the depreciation of the krone this year is contributing to stabilising inflation and activity in the economy. we may not yet have seen the full effects of the interest rate reductions on the krone exchange rate. at the same time, the krone may be influenced by fiscal policy and the outlook for wage growth. norges bank has no set target for the level of the exchange rate. developments in the krone are nevertheless of considerable importance in interest rate setting. the response to a change in the exchange rate will depend on its expected impact on inflation. this requires an evaluation of the reasons for the duration of the change. short - term fluctuations in the krone tend to have very limited effects on economic developments, while long - lasting changes may have an impact. norges bank has mainly based projections in the baseline scenario in its inflation reports on a constant exchange rate equal to the average for the previous three months, and in some cases the average for