the growth pause in the norwegian economy would be shorter than assumed, and it appeared that price and cost inflation was picking up. in order to contribute to satisfying the fundamental preconditions for stability in the exchange rate, norges bank decided to increase interest rates. this occurred at a time when the krone exchange rate against the euro had strengthened further and was stronger than the initial range. there was thus a risk that we would end up in the situation represented by the box in the lower right - hand corner of the matrix, in other words the exact opposite of the situation expected at the beginning of 1999. the fact that in the first case we decided to lower interest rates, even though the krone was weak against the euro, while in the second case we decided to increase interest rates, even though the krone was strong against the euro, reflects the symmetry in our response pattern. in this period, movements in the euro exchange rate against the us dollar have influenced the krone exchange rate against the euro without this being driven by conditions in the norwegian economy. this is a factor that we have not emphasised when setting interest rates. if we look at the two - year period as a whole, consumer price inflation has averaged about 2. 7 per cent. however, a more accurate impression of inflationary impulses is obtained when we exclude factors that have only a short - term effect on inflation, such as changes in indirect taxes, electricity prices, the revision of the house rent index and changes in petrol prices. the underlying rise in consumer prices has averaged about 2. 3 per cent in this period. it is nevertheless relevant to raise the question as to whether monetary policy in general has been too expansionary. i would, however, point out that monetary policy must be evaluated in relation to the decision - making basis that existed at the time the decisions were made. given the decision - making basis prevailing in 1999, it seemed likely that the norwegian economy would experience a growth pause and that price and cost inflation would fall. moreover, the international financial market was fragile as a result of the many financial crises the previous year. as new information gradually pointed to higher growth in norway and internationally, coupled with the prospect of higher - than - expected price and cost inflation, we raised the interest rate. it may be that the combination of the decline in interest rates in 1999 and the brighter international growth outlook, partly reflected in higher oil prices, had an impact on expectations formation that we underestimated. today

, the krone exchange rate is approximately in the initial range, while inflation is higher than the level aimed at by the ecb. however, the interest rate is oriented towards bringing price and cost inflation down towards this level. if price and cost inflation remains too high, this will translate into a weak and unstable krone exchange rate sooner or later. conclusion in the conduct of monetary policy we have two objectives. first, we have a long - term perspective where building confidence and credibility is important for ensuring nominal stability. second, the conduct of monetary policy is based on day - to - day discretion. the exercise of this discretion, however, is limited by norges bank's mandate and our interpretation of it. furthermore, we have ourselves contributed to restricting the exercise of discretion by being transparent in our response pattern, our analyses of economic developments and our assessment of the results of the monetary policy that has been conducted. we hope, and believe, that this contributes to consistency over time and makes an important contribution to building confidence and credibility. thank you for your attention. references : duisenberg, willem f. ( 2000 ) : " making monetary policy in a broad monetary union ", bis review 2000 / 88. eitrheim, øyvind, espen frøyland and øistein røisland ( 1999 ) : " can the price of currency options provide an indication of market perceptions of the uncertainty attached to the krone exchange rate? ", economic bulletin 3 / 1999, norges bank. kloster, arne ( 2000 ) : " estimating and interpreting interest rate expectations ", economic bulletin 3 / 2000, norges bank. storvik, kjell ( 1998 ) : " current economic and monetary policy issues ", address given by kjell storvik, governor of norges bank at the 43rd annual general meeting of forex norway on 28 august 1998. svensson, lars e. o. ( 1997 ) : " inflation forecast targeting : implementing and monitoring inflation targets ", european economic review 41, pp. 1111 - 1146.