The public sector benefits from the government’s large revenues from petroleum extraction, and although the direct employment effect is small, the impact on the overall economy is significant. These specific features of the Norwegian economy are important concerns behind the framework for economic policy. Fiscal policy is governed by a fiscal rule, designed to insulate public finances from oil price volatility. The government’s large petroleum revenues are channelled into the Government Pension Fund Global and the fund’s capital is invested abroad. The fiscal rule specifies that only the expected real return of the fund, on average over the cycle, is to be spent over public budgets every year. With this set-up, the fund also provides leeway for discretionary fiscal expansion when needed and enables future generations to benefit from Norway’s petroleum revenues. Monetary policy has targeted low and stable inflation since 2001. After an adjustment earlier this year, the operational target of monetary policy is now annual consumer price inflation of close to 2 percent over time. Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to counteracting the build-up of financial imbalances. Norges Bank sets the key policy rate with a view to stabilising inflation at the target in the medium term. The horizon will depend on the disturbances to which the economy is exposed and the effects on the outlook for inflation and for output and employment. Large and sudden outflows of capital are a potential source of instability for small, open economies.

Against this background, Norges Bank increased the key policy rate in September –for the first time in seven years. If the economy evolves as we now expect, this is the beginning of a gradual normalisation of the interest rate level. A long period of low interest rates and mounting household debt burdens has led to greater uncertainty surrounding the effects of higher interest rates. This suggests a cautious approach to interest rate setting. Rising protectionism internationally and turbulence in some emerging economies adds to the risk picture, with potentially strong negative effects for Norway. Communication is an important part of our monetary policy. We aim to be transparent and to communicate frequently, simply and clearly. We have published our own interest rate projections since 2005. All through this year we have repeatedly indicated that the key policy rate most likely would be raised after summer. Financial stability The financial crisis was a reminder that price stability is not sufficient to guarantee financial stability. In an environment of low global interest rates, there is a clear risk of a build-up of financial imbalances, which increases the risk of new economic downturns further out. Norges Bank has thus in periods kept its key policy rate somewhat higher than implied by a short-term goal of inflation and output stability. This does not mean that asset prices or debt have been given independent roles as target variables of monetary policy. The decisive factor has been the 2/3  BIS central bankers' speeches  consideration of economic stability over time.