During the financial crisis in 2008, several measures were deployed, such as the so-called swap arrangement, which provided banks with access to liquid government securities in exchange for covered bonds. Smaller banks were given loans with longer maturities. The measures aimed at improving banks’ access to long-term funding. The measures enabled banks to maintain virtually normal lending standards for Norwegian households and businesses. Norway’s swap arrangement and quantitative easing have some common features: bonds shift from private to public hands, and banks’ funding costs become lower than would otherwise have been the case. But there is an important difference. The swap arrangement was reflected in the government’s balance sheet – not the central bank’s. Quantitative easing, which increases the size of a central bank’s balance sheet, as observed in the US and the UK, is still not a relevant approach for Norway. Normally, the provision of capital and liquidity by authorities is not to replace banks’ own sound liquidity management and long-term market funding. Any decision relating to the use of the creditworthiness of government or taxpayers to finance banks and businesses rests with the Government and the Storting (Norwegian parliament). Chart: Liquidity and EUR/NOK exchange rate International turbulence can push the krone in both directions. On the one hand, in periods of severe market turbulence, investors have tended to shy away from presumably less liquid currencies. The krone market is among the less liquid markets. One indicator of liquidity is the so called bid-ask spread.

They consist, notably, of a reduction in governments’ debt financing needs, leading both to lower long-term interest rates (due to lower demand and declining risk premia) and to the release of revenues to finance more productive expenditure or growth-enhancing tax cuts. More leeway is then also created for the operation of automatic fiscal stabilizers in response to a cyclical downturn. In sum, fiscal consolidation is essential to secure public trust in the long-term sustainability of public finances, and to strengthen the foundations for sustained and durable growth. At the European level, fiscal consolidation should be in line with EU countries’ commitments under the Stability and Growth Pact, which provides the appropriate framework for the coordination of their fiscal policies. Given past experience of a slow and hesitant correction of excessive deficits, I see strong arguments for strengthening the implementation of the Stability and Growth Pact and reinforcing its rules for fiscal discipline. This could be complemented with enhanced national budgetary rules and procedures that are consistent with the EU fiscal framework. Monetary policy challenges Let me now turn to monetary policy and focus, in particular, on the response of the ECB to the crisis, and its current exit strategies. In response to the crisis and the ensuing subdued inflationary pressures, the Governing Council lowered its key interest rates to historically low levels. In particular, it reduced its main refinancing rate by 325 basis points to 1%, a level not seen in recent history in any of the euro area countries.