Countries that have attempted to shield their economies from the rest of the world have fallen back into stagnation. Nascent signs of increased protectionism are again giving cause for concern. If this tendency intensifies, international trade and prosperity will be undermined. With its open economy, Norway would be severely affected. It is in our own interest to make an active effort to counteract such a development. Monetary policy – a nominal anchor Against the background of an economic downturn and low interest rates among Norway’s trading partners, the conduct of monetary policy in Norway is challenging. A higher key policy rate might have curbed debt growth and demand pressures in the Norwegian economy. But in an environment of persistently low external interest rates, such a policy would likely have led to a sharp appreciation of the krone, resulting in too low levels of inflation and economic activity. Thus, the crisis in Europe and weak growth in the US are also contributing to keeping interest rates in Norway at a low level. BIS central bankers’ speeches  3  The main objective of monetary policy in Norway is low and stable inflation. This objective provides the economy with a nominal anchor. With firmly anchored inflation expectations, monetary policy can contribute to stable developments in the real economy. Chart 7: Rise in consumer prices The operational target of monetary policy is annual consumer price inflation of close to 2.5 percent over time. Over the past ten years, average inflation has been somewhat below, but close to, 2.5 percent.

Assessing its impact is difficult. Opinions may differ as to whether volatility in capital flows and exchange rates is excessive or, rather, a pure reflection of variations in fundamentals. By the same token, movements in asset or commodity prices can be seen to reflect the balance of supply and demand forces, or, alternatively, to be the product of speculative activity. Looking at the behaviour of most countries during the crisis, however, it is very apparent that they felt threatened by the instability of capital flows and, accordingly, sought to protect themselves from its consequences. The provision of international liquidity, in particular, has been severely disrupted during the crisis. Emerging (and some industrialised) countries have suffered from acute dollar liquidity shortages which had to be remedied, inter alia, through a network of currency swaps between central banks. The crisis is a powerful reminder that liquidity – both domestic and international ‐ can never be taken for granted. In today’s world, most international liquidity is privately provided and represented by claims on private institutions. Interbank markets play a crucial role in this process. The more capital markets become integrated at the short end, the more international liquidity is provided by the private sector. 2  BIS Review 127/2010  The importance of global private liquidity conditions was apparent in the period which followed Lehman’s failure. Output and trade fell across the world with astonishing simultaneity. It seemed natural to assume, at the time, that “traditional” forms of contagion – through goods or capital markets – were at work.