This may be related to greater uncertainty as to developments in the German economy. Forward interest rates 10 years ahead. US, Germany and Norway Per cent 7.5  7.5  7.0  7.0  Norway 6.5  6.5  6.0  6.0  US 5.5  5.5  Germany  5.0 4.5 01/01/01 01/05/01  5.0 4.5  01/09/01  01/01/02 01/05/02  01/09/02  01/01/03  Source: Norges Bank SG Gausdal 31.01.03  The mandate for monetary policy with an inflation target provides a sound basis for assessing Norges Bank's interest rate setting. According to the regulation, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall in general not be taken into account. This means that monetary policy must be oriented towards bringing underlying inflation, adjusted for the deviations mentioned above, close to 2½ per cent. An adjusted index such as this will be most relevant when assessing the orientation of monetary policy in retrospect. The most common indicator of underlying inflation – the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE) – has shown a year-on-year increase of between 1.8 per cent and 2.7 per cent since the inflation target was introduced. In December, the last observation to date, the year-on-year rise was 1.8 per cent.
Per cent of trend GDP 6  6  5  5  4  4  Norway1)  3 2  3  OECD countries  2  1  1  0  0  -1  -1  Euro area  -2  -2  -3  -3  -4  -4  -5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002  -5  1) Mainland Norway Sources: OECD and Norges Bank SG Gausdal 31.01.03  In spite of last year’s high wage growth, the interest rate was only raised by 0.5 percentage point last summer. Later in the year, the interest rate was reduced, primarily as a result of weak external economic developments that led to a reduction in interest rates abroad, thereby widening the interest rate differential. The global downturn and the strengthening of the krone have had a dampening impact on the Norwegian economy. When cyclical developments in Norway and abroad again converge, interest rates in Norway will be closer to the level abroad. This may also bring the krone back to a more normal level. Today’s particularly strong krone must also be seen in connection with the stock market decline, high oil prices and fears of war in Iraq. The very low level of interest rates among trading partners reflects an environment of sluggish growth, high unemployment and a risk of a prolonged downturn with deflation. This is a situation that we must strive to avoid.