as monetary policy is a blunt instrument and cannot affect, for instance, how growth and employment develop in the long term. in other words, the question has never been whether monetary policy should consider the real economy, but rather how this can best be done without neglecting the price stability objective. in practice, monetary policy takes the real economy into account in that we do not aim to bring inflation back on target as quickly as possible in every situation. when there is a deviation from target – which happens most of the time – our ambition is normally to return inflation to target within a time period of two years. one reason why we look ahead in this way is that monetary policy ’ s effects are exerted with a time lag. but the two - year horizon is also motivated by considerations to developments in the real economy. this creates some scope for trade offs in the inflation - targeting policy. let me explain. if we were only concerned with inflation, we would always want to bring inflation back on target as quickly as possible. on many occasions it would be possible to attain the target sooner than within two years. but we would then need to change the interest rate in larger stages and more often. this type of policy would risk leading to unwanted fluctuations in the real economy. this applies in particular to the situations where inflation has deviated from target as a result of supply shocks. these could be, for instance, sudden increases in companies ’ production costs due to soaring commodity prices and / or energy prices. the result could then be that inflation would rise above the target, while economic activity would be weak. the reverse can also occur - a fall in production costs could lead to inflation being lower than the target, while capacity utilisation was higher than is sustainable in the long term. if monetary policy were to aim at bringing inflation back on target as quickly as possible in these situations, it would further reinforce the fluctuations in the real economy. when economic developments are instead mainly driven by changes in demand, the conflict between the price stability target and the ambition to subdue fluctuations in the economy is not as clear. if, for instance, demand falls, the result will normally be that inflationary pressures also decline. an expansionary monetary policy can in this situation contribute to stabilising both inflation and activity in the real economy. there may then be justification for aiming to attain the inflation target within a shorter period than two years. of course, in practice it is not always easy to distinguish what shocks the economy

external economic conditions are pushing down import prices, even when measured in terms of what norwegian importers pay in foreign currency. in norway, intensified competition appears to be resulting in high productivity growth, which is probably contributing to low inflation. the inflation rate was lower than expected this summer, but picked up in september and is now approximately in line with projections in the july inflation report. growth is high in the norwegian economy. monetary policy affects the economy with a lag, and there is always substantial uncertainty surrounding inflation developments. the fall in the value of the krone through 2003, low interest rates and solid growth in the real economy are expected to gradually push up inflation. thank you for your attention.