to return to the old regime and introduce currency controls, but who would want to return to such an arrangement? exchange rate volatility is best prevented with economic policies which promote economic stability, but this does not only depend on the central bank. it is essential to take a long - term perspective. however, it should be noted that since september last year the central bank has been regularly purchasing currency in the foreign exchange market in order to boost its external reserve. the bank ’ s purchases of currency have amounted to more than 13 b. kr. since that time, and have undoubtedly weighed somewhat against the appreciation of the krona in the short run, although the long - term effect is negligible, if any at all. the central bank ’ s main monetary instrument is the interest rate on its repo agreements with credit institutions. in response to anticipated overheating of the economy the central bank began to raise its interest rates as early as 1997 and raised them rapidly in 1999 and 2000. in the beginning of 2001 the policy rate was up to 11. 4 %. since then the central bank has lowered its policy rate 13 times and it now stands at 5. 3 %. admittedly this is a higher level than among neighbouring countries such as the euro region, which have to tackle the problems of persistent economic weakness and high unemployment. the outlook is also bleak, for example in germany, judging from reports in the last few days. the european central bank has reviewed its growth forecast for the euro region as a whole and now expects 1 % gdp growth. according to this, growth will be zero in germany, because it will be higher in various peripheral regions of europe. thus the economic policy tasks that need to be tackled in iceland and the euro region have been different, and still are at the moment. on the other hand, central bank interest rates in norway are 5. 5 % to cite a close industrialised neighbour. the central bank ’ s policy rate is now 2¾ % in real terms, which is somewhat below the current assessment of the equilibrium interest rate. the central bank ’ s interest rates therefore act as a stimulus on the economy, being at their lowest level in real terms since spring 1996. it should also be borne in mind that interest rate changes affect demand and inflation with a considerable lag. thus the impact of the extensive interest rate cuts in recent months is still being felt. the credit institutions ’ required reserve with the central bank has been another of its monetary instruments,

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.