however. there are no clear signs of a turnaround in the labour market and seasonally adjusted unemployment has still not decreased. leading indicators such as credit growth, business surveys of labour demand, and growing turnover and imports nonetheless strongly suggest that demand will rise in the near future. boosted by increased quotas during the coming fishing year, more public sector construction projects and aluminium industry investments, a reasonable level of output growth can be expected this year. however, since the growth rate is below estimated potential, the slack in the economy will increase slightly compared with 2002. the growth rate in 2004 is expected to exceed estimated potential at 3½ %, meaning that the output gap could turn positive next year. inflation will nonetheless remain below the central bank ’ s target until the final quarter of 2004, according to the forecast. this is explained by the low current rate of inflation and excess output potential. two years ahead, inflation is forecast to creep above the target. on the whole the future looks fairly bright, but as always we should not allow the celebrations to get out of hand.

work for the norðural smelter expansion could reduce domestic demand and thereby dampen domestic inflationary pressures. offsetting this, the krona could probably weaken, as we are seeing now with a partial reversal of expectations about currency inflows for these investments. the uncertainty about the global economic outlook and the pessimistic tone in the first half of this year appear to be abating, at least in the us, even though the prospects in europe are not promising. as i mentioned earlier, the policy interest rate is the central bank ’ s main instrument for attaining its inflation target. the central bank last changed its policy rate on february 10 with a reduction of 0. 5 percentage points to 5. 3 %. the governors of the central bank of iceland have not considered that there are grounds for altering interest rates now, given the analysis and inflation forecast that i have outlined here. regarding deviations from the inflation target, it is important to bear in mind that a successful and credible monetary policy gives more weight to long - term than to short - term considerations, and that it is neither possible nor optimal to fine - tune the inflation rate with excessively volatile interest rates. we still consider the likely outlook that interest rates will remain unchanged for the time being, then rise as the peak of aluminium - related investments approaches. however, the point at which it may be necessary to raise interest rates could be further away than was previously foreseen, since inflation has been very low recently and will continue to be. as always, the outcome will depend on future developments. in light of the present low rate of inflation it cannot be ruled out that negative shocks to domestic demand and to imported inflation might call for a temporary reduction in interest rates from their present level. this could occur, for example, if proposed investments in connection with the norðural smelter expansion do not go ahead, if domestic demand driven from other sources than aluminium industry investments turns out much lower than is currently expected, or if deflationary pressures continue to build up in the global economy. nonetheless, the weakening of the krona in recent weeks reduces the likelihood that interest rates will be lowered. monetary policy will be reassessed when the occasion demands, and in particular when the fiscal and housing finance policies are made public. broadly speaking, economic and monetary developments and prospects provide growing signs of an ongoing recovery, mostly indicating that the upswing will gain momentum during the coming winter. some slack still exists in the economy,