extremely large. furthermore, the extension of the average remaining maturity from slightly less than three years to about seven years ( i. e., allowing for a range of about six to eight years ) necessitates the purchases of jgbs with longer maturity, including 20 - and 30 - year bonds. such jgbs with super - long maturities are likely to be held to maturity by institutional bis central bankers ’ speeches investors and their market is not so active. against this background, some market participants wonder if the bank is able to purchase these jgbs in practice. to answer this question, we can do this, in principle, so long as the bank purchases a wide range of jgbs through a competitive auction. i assure you that we will achieve our commitment. having said so, however, such purchases by the bank might not proceed smoothly because they go beyond the market ’ s convention. to start with, these measures are meant to encourage a further decline in interest rates ; thus, effects on the market are inevitable to some extent. as the bank wants to facilitate such operations, it is vital to have the cooperation of market participants, such as counterparties ’ active bidding in the bank ’ s market operations. the bank has decided to set forums for enhanced dialogue with those market participants in order to exchange views pertaining to money market operations and market transactions in general. in fact, it has already initiated such dialogue with various market participants since last week. relationship with financing the fiscal deficit once the bank embarks on the large - scale purchase of jgbs under the quantitative and qualitative monetary easing, some worry that this will result in financing the fiscal deficit. the jgb market remains stable, but if such purchases by the bank were regarded as monetizing government debt, the jgb market might start destabilizing, raising long - term interest rates in a manner inconsistent with the real economy. this might not only offset the monetary easing effects but also have negative effects on japan ’ s financial system and its economy as a whole. of course, the jgb purchases under the quantitative and qualitative monetary easing are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits. moreover, in order to avoid a possible arousal of doubt regarding the bank ’ s increasing purchases of jgbs as financing fiscal deficits, it is vital for the government to clearly show the future course of fiscal consolidation and steadily make progress to reform the fiscal

jarle bergo : projections, uncertainty and choice of interest rate assumption in monetary policy speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), at the foreign exchange seminar of the association of norwegian economists, sanderstølen, 27 january 2006. the charts in pdf - format can be found on the norges bank ’ s website. please note that the text below may differ slightly from the actual presentation. the speech does not contain new assessments of the economic situation or of current interest rate setting. * * * introduction first of all, i would like to thank you for inviting me to this seminar. participants at this and other seminars have occasionally shown some interest in norges bank ’ s views on future interest rate developments. for a long period, our analyses were based on the assumption that the interest rate would move in line with market expectations, and the discussion was usually about whether the bank agreed with this interest rate outlook or had a different interest rate path in mind. in inflation report 3 / 05, projections were based on the bank ’ s own projected path for future interest rates for the first time. in other words, from using technical assumptions and others ’ assessments of our future monetary stance, we have now in a sense “ assumed ownership ” ourselves of the interest rate path in our projections. this seminar would therefore seem to give me an appropriate opportunity to provide some background on this issue and on the assessments underlying our forecasting. when we make forecasts for variables such as output and inflation, we must at the same time have formed an opinion of the future interest rate path. interest rate developments, in turn, must be considered in the context of other forecasts. the choice of interest rate path in forecasting is important because monetary policy influences developments in the economy primarily through expectations. i will come back to this later on in my speech. first i will focus on the role of the interest rate in norges bank ’ s projections. i will then move on to describe the analytical tools used by the bank to arrive at a projection for future interest rates. finally, i will discuss the uncertainty inherent in the projections. choice of interest rate assumptions in forecasting norges bank seeks to achieve an interest rate path that provides a reasonable balance between the objective of bringing inflation up to target and the objective of stabilising developments in output and employment. this means we have to judge how these variables will develop in the period ahead and how they are affected by the