has increased, according to the imf and the oecd. high oil prices may result in somewhat higher inflation abroad than previously projected. the objectives of bringing inflation back to the target of 2. 5 per cent and anchoring inflation expectations imply a continued low interest rate. on the other hand, there are expectations that high output growth will persist. the objective of stabilising developments in output may, in isolation, imply a higher interest rate. inflation is gradually picking up. high capacity utilisation may generate a continued sharp rise in property prices and household borrowing. this could be a source of instability in demand and output in the somewhat longer run. the executive board ’ s assessment in the june inflation report was that the interest rate may gradually – in small, not too frequent steps – be brought up towards a more normal level if economic developments are approximately as projected in the report. such an interest rate path was considered to provide a reasonable balance between the objective of stabilising inflation at target and the objective of stabilising growth in output and employment. it was the executive board ’ s assessment that the sight deposit rate should lie in the interval 1¾ - 2¾ per cent in the period up to the publication of the next inflation report on 2 november. following the monetary policy meeting on 21 september, the executive board stated that developments in output, demand and underlying inflation had been consistent with the projections in the june inflation report. the executive board also stated that its monetary policy strategy and assessments indicate that the interest rate should be gradually increased in the period ahead. one option was to increase the interest rate at this meeting, but the executive board found it appropriate to leave the interest rate unchanged. household credit growth monetary policy easing through 2003 and into 2004 has resulted in low real interest rates. short - term real interest rates may now be considerably lower than the level that implies long - term balance in the economy – the neutral real interest rate. a low real interest rate, and expectations of a continued low real interest rate, will contribute to stimulating activity even after the effects of the interest rate fall unwind. although the projections are based on rising real interest rates, the real interest rate will be lower than the neutral rate during the entire period. the monetary policy stance is therefore expansionary. so far, the effects do not appear to be stronger than expected, but we have little experience of such low interest rates. how quickly prices and wages will react when growth in output and employment picks up is uncertain.

economic policy received broad support in the storting. the rule specifying that only the real return on the petroleum fund is to be used means that the capital in the fund shall not be depleted. the capital in the petroleum fund will increase as long as there is a positive cash flow ( to the central government ) from petroleum activities. when the conversion from petroleum wealth to financial assets has been completed, the objective will still be to restrict withdrawals so that the real value of the fund ’ s capital is maintained - in principle, indefinitely. the petroleum fund functions as a buffer against movements in the krone exchange rate when oil prices vary. the cash flow from an increase in oil prices will accrue to the fund and be invested abroad. in this way, the fund contributes to limiting an appreciation of the krone and maintaining a stable exchange rate. at times, it seems that participants in the foreign exchange market underestimate the petroleum fund ’ s buffer mechanism. since the summer of 2004, the krone, measured by the trade - weighted exchange rate index ( twi ), has appreciated by about 5 per cent. the chart shows the exchange rate and the price of oil since 1999. there does not appear to be any clear relationship between the nominal exchange rate and oil prices over time. the krone has appreciated in periods with high oil prices, but the same has occurred when oil prices have been low. the correlation between the oil price and the krone exchange rate has varied over time. since inflation targeting was introduced in march 2001, the average correlation has in fact been zero. this result is worth noting and indicates that the export of capital via the petroleum fund has protected the nominal exchange rate from price fluctuations in the oil market. therefore, there is cause for some optimism concerning the possibility of shielding the mainland economy from the effects of swings in oil prices. in the long run, however, petroleum revenues and their use will affect the level of costs in norway. an increase in oil prices may generate expectations of higher use of petroleum revenues in the future, particularly if high oil prices are expected to persist. such expectations may exert appreciation pressures on the krone. it may also generate expectations of higher returns in the norwegian stock market than in foreign markets, which also can and has contributed to an appreciation of the krone. our assessment is that developments in oil prices and an increased cash flow have been responsible for the appreciation of the krone since the spring of 2004. we are approaching a