risk that continued trade shifts and increased competition in labour and product markets might result in lower price and wage inflation and weaker pressures in the economy. through autumn, statistics did not favour either alternative, but now we see signs of both. this may increase the uncertainty surrounding the state of the norwegian economy. monetary policy must strike a balance between the various objectives. strong growth in the norwegian economy, a tighter labour market, a pronounced rise in equity prices and high credit growth must be weighed against unexpectedly low inflation. we have illustrated the uncertainty surrounding forecasts for the interest rate, inflation and the output gap with fan charts. the width of the fan charts is based on historical disturbances. however, there is no certainty that future disturbances will be of the same nature and scale. the wider the fan charts are, the more uncertain the projections. uncertainty surrounding the interest rate reflects the monetary policy response to unexpected disturbances to inflation, output and the exchange rate. on the basis of the analysis in the inflation reports, norges bank ’ s executive board assesses the consequences for future interest rate development and adopts a monetary policy strategy for the period to the next report. the executive board ’ s assessment in its meeting 16 march was that the interest rate may gradually – in small, not too frequent steps – be brought back towards a more normal level. the objective of bringing inflation back to target and anchoring inflation expectations nevertheless implies that monetary policy will remain expansionary. the sight deposit rate should be in the interval 2¼ – 3¼ per cent in the period to the publication of the next inflation report on 29 june 2006, conditional on economic developments that are broadly in line with the projections. norges bank ’ s executive board also decided at its meeting on 16 march to raise the sight deposit rate by 0. 25 percentage point to 2. 50 per cent.

all news that may influence the inflation outlook. publication of interest rate forecasts – how does the market react? when we started forecasting the interest rate in 2005, we could refer to the experience of new zealand 2, which had just experienced pronounced shifts in the interest rate and interest the chart is from archer, d. ( 2005 ) : “ central - bank communication and the publication of interest rate projections ”, presented at sveriges riksbank ’ s conference : “ inflation targeting : implementation, communication and effectiveness ” : http : / / www. riksbank. com / templates / page. aspx? id = 15814. rate forecasts. the chart illustrates that we were not able to anticipate the financial crisis in autumn 2008, but have otherwise been on track. our latest interest rate forecast suggests that the interest rate will remain low for a long period. but we also note that market participants believe it will take even longer for the interest rate to move up to a more normal level. in autumn 2012 we expect an interest rate of close to 3½ per cent, while market participants expect an interest rate of around 2¾ per cent 3. the deviation is considerable, but not exceptionally large. our interest rate forecast seems to have the greatest effect on market interest rates in the year ahead. the difference is greater slightly further out. differences may indicate that the central bank and market participants at times have divergent views regarding developments in the norwegian economy. how does the market react to the publication of the interest rate forecast? for example, market participants may believe that a higher interest rate level in norway than in other countries will result in a stronger krone exchange rate because it may be profitable to invest in norwegian kroner and borrow in other currencies. our projections are based on the assumption that the exchange rate will over time adjust so that the return on investments in norwegian kroner will be the same as the return on investments in foreign currency – the so - called uncovered interest rate parity assumption. a positive interest rate differential will then reflect that the krone is expected to depreciate over time. at the same time, we seek to take account of the fact that risk premiums on investments in norwegian kroner may vary over time. the interest rate forecasts have been useful – and it is an advantage, not a weakness, that the uncertainty surrounding the forecasts is well known. in 2005 and again in 2009, the key policy rate