achieving an inflation rate of 2½ per cent two years ahead. norges bank ’ s views on the inflation outlook are presented three times a year in the inflation report. our projection for inflation in the period ahead is presented as well as our assessment of the balance of risks surrounding this projection. the executive board ’ s updated assessments are presented in connection with the monetary policy meetings every six weeks. immediately after each meeting, the bank issues a press release and holds a press conference. the key interest rate is set on the basis of an overall assessment of the inflation outlook two years ahead. our inflation projections and our views on the balance of risks associated with these projections provide a summary of these assessments. norges bank ’ s inflation projection is our assessment of the most probable outcome of the rise in cpi two years ahead. in setting interest rates we also place emphasis on the probability distribution – or the balance of risks – surrounding the projection. therefore, we also publish our judgement of the risk associated with our own projections. the phasing in of petroleum revenues has to be counteracted by a tighter monetary policy than would otherwise be the case. this may be accomplished through an adjustment of the interest rate, an appreciation of the krone or both. small countries have experienced fairly wide exchange rate fluctuations. the swedish krona has depreciated by more than 10 per cent since summer 2000. the australian dollar has weakened by over 30 per cent since spring 1997. the uk, canada and new zealand have also experienced wide exchange rate fluctuations. the norwegian krone, on the other hand, has been relatively stable. a monetary policy that is oriented towards low and stable inflation will contribute to stabilising aggregate demand and output. as a result, the central government budget will not normally have to be used actively to stabilise the economy. an increase in unemployment that is due to a higher rate of increase in labour costs than implied by productivity growth cannot be offset by low interest rates or higher public spending and tax cuts, but requires changes in the functioning of the labour market. the planned use of petroleum revenues implies that the sheltered sector will lay claim to a larger share of the labour force. this will probably cause a decline in manufacturing employment. the ensuing deterioration in competitiveness may lead to restructuring. in the long run, monetary policy cannot influence overall employment or its distribution across industries. norway ’ s terms of trade flucture widely. this is largely attributable to variations in the oil price. however,

svein gjedrem : monetary policy and wealth management address by mr svein gjedrem, governor of norges bank ( central bank of norway ), to the board of directors of the national insurance fund, oslo, 14 march 2002. this address is based on assessments presented at the press conference following the monetary policy meeting of norges bank ’ s executive board on 27 february 2002, and on previous addresses. accompanying charts can be found on the norges bank ’ s website ( www. norges - bank. no ). * * * the guidelines for economic policy were revised last year. the expected real return on the government petroleum fund is hereafter to be used over the central government budget, and monetary policy is to be oriented towards low and stable inflation. economic agents can act on the assumption that low and stable inflation will be a constant feature of economic policy. wide variations in the price level make it more difficult to predict the real content of agreements and budgets. unexpected fluctuations in the price level may easily lead to fluctuations in the real economy and instability in financial and property markets. high and variable inflation also leads to an arbitrary redistribution of resources and income. hence price stability is the best contribution monetary policy can make to economic growth, prosperity and appropriate distribution. low inflation is the objective, and the interest rate is the instrument. commercial and savings banks have accounts with norges bank, and the executive board decides the interest rate on these. the deposit rate forms the floor for the shortest money market rates. transparency about intentions, strategies and the implementation of monetary policy makes it easier for economic agents to assess monetary policy. if monetary policy is predictable, an important source of uncertainty is reduced, and – other things equal – the interest rate required to achieve the inflation target will be lower. if economic agents are to have confidence in monetary policy, transparency regarding the central bank ’ s response pattern is probably a precondition. the interest rate affects inflation through a number of channels. an increase in the interest rate will normally contribute to reducing inflation by curbing demand for goods and services and by strengthening the krone exchange rate against other currencies. an interest rate reduction has the opposite effect. monetary policy influences the economy with considerable and variable lags. our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. two years is therefore a reasonable time horizon for achieving the inflation target of 2½ per cent. interest rates are set with a view to