Jarle Bergo: Will strong growth in the banking industry continue? Views on the balance of risks Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at a banking industry seminar on primary capital certificates, Oslo, 13 September 2007. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 15 August, Financial Stability Report 1/07 and on previous speeches. *  *  *  Thank you for inviting me to this seminar on primary capital certificates to give an introductory speech on developments in the banking industry and the balance of risks. As we all know, there is a strong global focus on financial institutions and financial markets at present, with frequent use of words such as "turbulence", "problem" and "crisis". I will spend some time on the background to these developments and try to assess the possibility of similar problems in Norway. I will also point to other risk elements that the industry should bear in mind. First, however, I will give a brief review of the economic situation in Norway and how this has affected the banking industry. The Norwegian economy and the financial sector The Norwegian economy is now in a cyclical upturn. Over the past three years, mainland GDP has grown by approximately 4½ per cent annually, and this high rate of growth has continued in 2007.

In the first half of the year, inflation remained low due to weak demand-side pressures and anchored inflation expectations. The latter reflect Bank of Albania’s prudential monetary policy. This policy has enabled the long-term interest rate cut and has contributed to maintaining the banking system soundness parameters. Also, Albania’s improved external position, together with the national currency’s stability and financial sector’s overall sound balances, have further strengthened the financial stability and ensured one of the pillars necessary for its long-term development. The second-quarter inflation turned out 2.2%, a lower rate than in the first quarter. Lower agricultural product inflation and steady prices for other CPI basket items shifted this quarter’s inflation down. Agricultural price inflation accounted for about 90% of the headline inflation, reflecting both the price volatility of agricultural products and their relatively high share in the CPI basket. From the macroeconomic perspective, the presence of spare productive capacity continues to determine the inflation performance. The sluggish growth of aggregate demand is associated with low increase in investments, employment, wages and labour costs in the economy. This chain of factors is further translated into weak pressures for consumer price rise. It is also confirmed by the record low rates of core inflation over this period. On the supply side, the low price rise in the domestic market has reflected the price stability in global markets and economic agents’ anchored inflation expectations. With regard to economic developments, INSTAT data show that the first-quarter economic growth was 1.7%, remaining similar to the previous year’s figure.