shares in domestic and foreign markets partly because of the strong real krone exchange rate. in the face of major restructuring as a result of shifts in the international division of labour, it is a disadvantage for norwegian business and industry that costs are high. reports from norges bank ’ s regional network confirm the picture of an expanding economy. in the august / september round of interviews, our contacts throughout the country reported continued growth in all the main industries. in region east, the rate of growth in manufacturing is somewhat lower than earlier this year, while growth in the building and construction sector is increasing. residential construction is still driving activity in this sector. although commercial building activity now appears to be picking up in other parts of the country, this does not as yet apply to region east. business sector demand for services is rising. the market for commercial services and it and telecommunications services is showing marked improvement. the retail trade sector reports rising demand, particularly for consumer durables such as cars and furniture. our contacts in services and retail trade report a moderate increase in investments in the year ahead. signals from the regional network indicate that employment is continuing to increase in the building and construction sector, while manufacturing reports a slight decline. employment in the service sector is rising for the first time since the network was established in october 2002. directorate of labour figures show that unemployment has fallen most in region south and region east since the beginning of 2004. in region east, an important sector is commercial services, accounting for close to 15 per cent of employment. it is in this sector, in addition to manufacturing, that unemployment has fallen most on a nationwide basis. since july, oil prices have varied between usd 34 and 52, the highest nominal levels recorded. measured in real prices, oil prices are nonetheless clearly lower than the levels recorded in the beginning of the 1980s. in contrast to earlier periods of sharply rising oil prices, the main reason behind the current rise in oil prices is a surge in demand and limited excess production capacity. growth in oil demand has been particularly strong in regions where production is relatively energy - intensive, such as china and other non - oecd countries. china alone accounts for about 1 / 3 of global growth in oil demand this year. moreover, there has been a marked reduction in excess production capacity in opec countries. small production problems have therefore affected prices more than would otherwise have been the case. in the short term, oil prices constitute the greatest risk to the outlook for the global economy. high oil prices

course of spring 2005. the contribution from the exchange rate to inflation will then gradually become slightly negative. there are prospects that inflation will reach the inflation target towards the end of the projection period. there is uncertainty surrounding the projections. the projections are partly based on our analysis of relationships in the economy, the exchange rate assumption and the forward interest rate assumption. we can give some indication of the uncertainty surrounding the projections on the basis of historical deviations between projected and actual price developments. based on these calculations, inflation at end - 2007 is projected with a probability of 50 per cent to be between 1. 75 and 3. 25 per cent. consumer prices may show erratic variations from one month to the next. these fluctuations may be due to temporary conditions. at other times, they may reflect more lasting changes. when the figures deviate from our projections, more observations are therefore needed before an assessment can be made of whether inflation is in line with the projections. the projections in the inflation report are based on the assumption that the interest rate moves in line with financial market expectations. this implies that norges bank maintains the key interest rate at the current level in the period to summer 2005, with a gradual increase thereafter. it is the executive board ’ s assessment that the projections seem to provide a reasonable balance between the objective of increasing inflation and at the same time avoiding excessive growth in output and employment. the projections imply a sight deposit rate in the interval 1¼ - 2¼ per cent in mid - march 2005. uncertainty as to the effects of previous monetary policy easing and the unusually low interest rate level imply, on the one hand, that we should exercise caution with regard to further interest rate reductions. on the other hand, the prospect of continued low inflation for a period ahead implies that wide deviations from projected economic developments would be required before interest rates should be increased. the prospect of continued low inflation in norway also implies that we should lag behind other countries in setting interest rates at a more normal level. at its monetary policy meeting on 3 november, the executive board decided to leave the sight deposit rate unchanged at 1. 75 per cent. at this meeting, the executive board did not see any clear alternatives to leaving the interest rate unchanged. in reaching its decision, the executive board has weighed the objective of bringing inflation back to target against the risk that output growth may eventually be too high.