with ease. today, the european central bank – more than 300 years younger than the bank of england – has already successfully established a reputation for guaranteeing price stability in the euro zone. the three - year - period from 1998 to 2000 saw an average rate of inflation of 1. 1 %. this early euro - period is remarkable : it was one of the three most outstanding periods of price stability performance in germany since the 1950s. since last summer high energy costs, in part linked to the external value of the euro, and demand shifts due to the european food crisis have taken their toll. thus, from today ’ s point of view, it looks probable that in 2001 we will not be able to meet our target of holding inflation below the 2 % ceiling. however, on may 10, the governing council decided to lower official interest rates by 25 basis points. the interest rate for the main refinancing operation is now 4. 5 %. this decision was based on the twopillar strategy, i. e. monetary growth in the first pillar and the broader assessment of the outlook for price developments in the second pillar. in the period since last spring, monetary growth came ever closer to the reference value of 4. 5 %. furthermore, indications that monetary growth is somewhat overstated have been confirmed recently. non - euro area residents ’ purchases of negotiable paper included in m3 – that is money market fund units and other marketable paper – are sizeable as well as rising. however, the relevant concept of m3 is residents ’ holdings. once these distortions are accounted for, the first pillar indicates no further risks for price stability. the second pillar also points in the direction of receding upward risks for price stability. external developments are dampening the prospects for euro - area growth. wages are rising, but only moderately. on balance, both pillars of the ecb ’ s monetary strategy paint a rather favourable picture for the medium - term outlook for price stability. thus, we are confident that the hicp will drop below the 2 % threshold during the course of the next year. in the run - up to european monetary union, prices in those european countries with a history of higher inflation rates had been remarkably stable. all countries met the inflation criterion with ease. recently, the sustainability of this monetary convergence process has been questioned. the spread between the lowest and the highest inflation rates in the euro area is now wider than it was at the outset of monetary union. in january 1998

##ges bank's mandate, monetary policy is to be aimed at maintaining a stable krone exchange rate against european currencies, based on the range of the exchange rate maintained since the krone was floated on 10 december 1992. in the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range. in its conduct of monetary policy, norges bank focuses on the fundamental preconditions for achieving exchange rate stability against the euro. first, price and cost inflation must be brought down towards the corresponding aim for inflation for the european central bank ( ecb ). at the same time, monetary policy must not in itself contribute to deflationary recessions as this could undermine confidence in the krone. there are few significant differences between norway's actual response pattern and that of countries with explicit inflation targets. price and cost inflation must be steered towards that aimed at by the ecb. however, in norway fiscal policy has traditionally had an important role in stabilisation policy. this has reduced the burden on monetary policy. in addition, the norwegian wage determination system has probably contributed in periods to dampening the impact of shocks hitting the economy. monetary policy influences price and cost inflation with a time lag of perhaps one to three years. in consequence, projections for price and cost inflation with a horizon of a couple of years play an important part in the setting of interest rates. from the time interest rate decisions are taken until the interest rate has an impact on prices and costs, various types of disturbance occur which influence price and cost inflation. thus it is not possible to maintain full control over developments in prices and costs. actual price and cost developments normally deviate somewhat from earlier projections. on the basis of the deviation between actual price inflation and norges bank's projections over the last few years, an uncertainty interval for price inflation can be calculated. how can monetary policy be credible when it is so difficult to control price inflation? the answer is to be found in two factors. first, economic agents base their decisions on the probable inflation outcome. although there is considerable uncertainty, monetary policy will be credible if the outcome they consider most probable, and thus base their decisions on, is consistent with the nominal anchor. second, confidence is linked to the response pattern. if price inflation in norway is higher than that aimed at by the ecb as a result of shocks, there must be confidence that monetary policy instruments are