assumed to rise somewhat faster in the longer term than current forward rates may imply. exchange rate movements are difficult to project. the interest rate path at home and abroad may be consistent with an approximately unchanged krone exchange rate. the high growth rate in the economy implies a gradual pick - up in price and cost inflation. with interest rate developments as outlined above, cpi - ate inflation is projected to increase from about 1¼ per cent today to about 2 per cent at the end of 2007. there are prospects of a further increase in inflation, with inflation projected to be close to the target of 2. 5 per cent three years ahead. according to our estimates, capacity utilisation is now slightly higher than its normal level. mainland gdp is projected to show sustained strong growth in 2006. the output gap is expected to increase over the next two years, but will peak at a fairly moderate level as gradual increases in the interest rate dampen demand growth. growth in the global economy is projected to remain high, resulting in both high demand and favourable prices for the norwegian export sector. there are prospects that high petroleum investment will contribute to sustaining the high level of activity in the norwegian economy. in 2008 and 2009, a continued high level of petroleum revenues may imply an expansionary fiscal policy. interest - rate setting since last summer has been oriented towards a gradual increase in the interest rate – in small, not too frequent steps – towards a more normal level. based on norges bank ’ s assessment of the driving forces in the economy, this strategy appears robust. output growth is strong and the labour market is becoming tighter more quickly than expected. higher growth in the economy may in isolation suggest a faster increase in the interest rate ahead. this would reduce the risk of bottlenecks in the economy, with rising cost inflation and continued debt build - up. on the other hand, the objective of bringing inflation up towards the target and anchoring inflation expectations argues for restraint in the upward movement of interest rates. on balance, this implies that the interest rate outlook remains virtually unchanged compared with the previous report. thus our current assessment indicates an interest rate path where the interest rate is raised by about 1 percentage point this year, in line with expectations in the market. the two previous inflation reports underlined the risk that a low interest rate over a long period may result in strong pressures in the economy, with a risk of bottlenecks, accelerating cost inflation and debt accumulation. on the other hand, the reports also pointed to the

the upturn. at the same time, solid global growth has led to increased demand for many norwegian export goods and high prices. fixed investment in the petroleum sector has increased sharply, resulting in growing demand for goods and services supplied by mainland enterprises. mainland fixed investment has also picked up gradually. so far in the economic upturn, the mainland economy has grown by an average of about 3. 5 per cent quarterly, measured as an annualised rate. the output gap is a measure that expresses our assessment of total capacity utilisation in the economy. the output gap is defined as the percentage difference between actual output and potential output. potential output indicates the level of output that is consistent with price and cost stability. the estimate for the output gap is uncertain partly because the level of potential output is unobservable. since official statistics on overall activity in the economy are not available immediately and are subsequently revised, the level of actual output will be uncertain. in assessing the size of the output gap, technical calculations are compared with other information about capacity utilisation in the economy. as more information has come to light, the output gap has been revised downwards for 2005, but at the same time the growth rate towards the end of the year is estimated to be higher. output has increased more rapidly than potential output for 2 - 3 years. much of the available capacity has now been put to use. we now estimate that capacity utilisation was approximately ½ per cent above normal at end - 2005. despite strong economic growth, inflation is still low. as the recovery became more broadly based, inflation gradually began to edge higher. in the second half of 2005, the 12 - month rise in consumer prices adjusted for tax changes and excluding energy products ( cpi - ate ) varied between 1 and 1½ per cent, before surprising on the downside in december and january. in february, inflation edged up again. monthly variations in the cpi - ate have been fairly pronounced recently. there is little prospect that inflation will increase substantially in the near term. if we adjust for the effect of reduced maximum day - care rates, the year - on - year rise in the cpi - ate is projected to be 1¼ per cent in the second quarter of 2006. inflation will be dampened by continued low external price impulses and the appreciation of the krone through 2004 and 2005. after a period, the unwinding of the sharp rise in petrol prices through 2005 will probably lead to some decline in the year - on