policy may become somewhat more robust. 1 key policy rate a monetary policy that only takes into account the consideration of bringing inflation rapidly back to target ( criterion 1 ) would imply that the interest rate should rapidly have been reduced to below 1 per cent when we presented the latest monetary policy report. in that case, the interest rate would have had to be raised rapidly again to prevent activity and inflation from becoming too high further ahead. such a strategy could be consistent with the desire to safeguard against inflation expectations becoming entrenched below the inflation target, but could on the other hand have a substantial impact on output and employment. developments become more stable if weight is also given to stabilising output ( criteria 1 and 2 ). this would also imply an interest rate reduction first and then an interest rate increase further ahead. giving weight to output implies that inflation is brought back to target somewhat later. the consideration of a steady interest rate course suggests that small, temporary disturbances should normally not result in abrupt shifts in the interest rate. if this consideration is also given weight in interest rate setting ( criteria 1, 2 and 3 ), the impact on the interest rate will be smaller. if we also give some weight to the interest rate given by a simple monetary policy rule – the taylor interest rate rule ( criteria 1, 2, 3 and 4 ), the key policy rate will remain at today ’ s level for a period and then be raised gradually. this results in a further small downward shift in the projections for inflation and the output gap and is consistent with the projections in the previous monetary policy report. the projections for inflation and economic activity vary from one report to the next. hence interest rate prospects will also change. in our reports we attempt to illustrate which factors have influenced the changes in the interest rate forecast through their effects on the prospects for inflation, output and employment. a simple rule can function well under alternative models for the economy. the type of uncertainty we want to be robust to will determine what the best rule will be. change in interest rate forecast over time the interest rate forecast is an expression of a balance between various monetary policy considerations and a response pattern that households, firms and financial institutions can build on. the interest rate forecast is based on our understanding of the functioning of the economy. the uncertainty surrounding the interest rate forecast is highlighted in our fan charts with uncertainty intervals around the interest rate forecasts. the forecasts have shifted considerably over time. this reflects that the interest rate is an instrument that should react to

as a percentage of gdp, as in the wake of world war ii after a period of debt - financed military spending. the high level of public debt limits the scope for further fiscal impetus to boost economic activity. a lack of confidence in some countries ’ debt - servicing capacity and ability to boost growth capacity led to a flare - up in financial market turbulence last spring. a number of countries are in a position where they feel compelled to raise taxes and curtail spending. exports from india, china and other asian countries are expanding rapidly. substantial trade deficits in the western world are partly being financed by an increase in reserves in asian countries. real exchange rates in western countries are most likely too strong. this is reflected in pressure tendencies in china and a number of other emerging economies and high unemployment and low inflation in traditional industrialised countries. in western countries and japan exchange rates react to news. pessimism translates into a flight to safe havens. positive news, however, reduces risk premiums and tends to lead to a strengthening of exchange rates in commodity - based economies where interest rates are somewhat higher. but the nominal exchange rates of many asian countries remain fixed. thus, exchange rates are not allowed to fully contribute to reducing trade imbalances, narrowing cost differentials and spreading growth impulses. growth in the world economy has an influence on the norwegian economy. norway is reaping the benefits of continued high commodity prices and sizeable investments by oil companies. moreover, we have had economic policy leeway thanks to the credibility associated with solid government finances and firmly anchored inflation expectations. the norwegian economy is experiencing a mild downturn and inflation is on the low side, while capacity utilisation now seems to have stabilised. the low interest rate level is facilitating the servicing of high household debt and house prices are high. households in norway are more confident about the future than households abroad. since october last year, the key policy rate has been raised by a total of 0. 75 percentage point to 2 per cent. the low interest rate level will in itself contribute to pushing up demand. inflation expectations are probably stable and real interest rates are very low. at the same time, the krone exchange rate is very strong in real terms. the projections published in the june monetary policy report suggest that the key rate should be held at today ’ s level to around the end of the year and then gradually be raised to a more normal level. in our monetary policy report we present our own forecasts for the