In particular, foreign demand for euro area exports has declined, and euro area domestic activity has contracted in the face of weaker demand prospects and tighter financing conditions. The survey data and monthly indicators for November and December that have become available since our last meeting clearly point to a further weakening of economic activity around the turn of the year, indicating the materialisation of previously identified downside risks to activity. Looking further ahead, on the basis of our current analysis and assessment, we continue to see global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues. At the same time, we expect the fall in commodity prices to support real disposable income in the period ahead. Furthermore, the euro area should over time reap the full benefit from the effects of policy measures announced over recent weeks. BIS Review 5/2009  1  In the view of the Governing Council, this outlook for the economy remains surrounded by an exceptionally high degree of uncertainty. Overall, risks to economic growth remain clearly on the downside. They relate mainly to the potential for a stronger impact on the real economy of the turmoil in financial markets, as well as to concerns about the emergence and intensification of protectionist pressures and to possible adverse developments in the world economy stemming from a disorderly correction of global imbalances. It is crucial that all parties concerned make their contribution to lay sound foundations for a sustainable recovery.
When evaluating whether the interest rate level is appropriate, one must consider the quality of the analyses of developments in the Norwegian and international economy, as well as the trade-offs that have been made. When we look back and assess interest-rate setting, we must also take into account the reasons for the deviations from the target. For the average annual rise in consumer prices over time to be the same as the inflation target, the disturbances that affect the economy must be fairly symmetrical. Price inflation has been lower than the inflation target for a longer period and the interest rate is being set with a view to gradually closing the inflation gap. The aim is not for inflation to overshoot the target to the same extent a few years ahead. Therefore, when we in retrospect assess interest-rate setting, we cannot solely look at average CPI inflation. Monetary policy must also be seen in the light of historical inflation. In the 1970s and 1980s, inflation was very high and volatile. The economy did not at that time have a nominal anchor. Since the beginning of the 1990s, inflation has been low and stable, both internationally and in Norway. While inflation in the 1970s and 1980s varied between 4 and 15 per cent, inflation has generally remained in the interval 1½ - 3½ per cent since 1990. The economy now has a nominal anchor.