svein gjedrem : the outlook for the norwegian economy and monetary policy assessments speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at a presentation of the monetary policy report 1 / 09 at goldman sachs, london, 26 march 2009. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 25 march, monetary policy report 1 / 09 and on previous speeches. please note that the text below may differ slightly from the actual presentation. * * * introduction norges bank ’ s executive board decided yesterday to reduce its key policy rate by 0. 50 percentage point to 2. 00 per cent. the monetary policy report, published yesterday, indicates that the key policy rate should be gradually reduced further to a level of around 1 per cent in the second half of 2009. financial crisis but active public measures in september 2008, the turbulence in financial markets erupted into a full - blown global crisis. global economic growth was already slowing, but the situation has deteriorated in the past few months of 2008. the turnaround hit hard, with synchronised effects on virtually all financial and goods and services markets, not only in the us but also in europe, asia, latin america and oceania. we are now in the deepest downturn in oecd countries in the postwar period. gdp in the oecd area as a whole is expected to fall in 2009 for the first time since the second world war. the prospects for the world economy are now even weaker than we anticipated at the end of 2008. international trade is contracting markedly, and it will take time before growth rebounds. our projections for growth among our trading partners have been revised down to - 3 per cent in 2009 and ¾ per cent in 2010. moreover, the norwegian economy seems to be contracting more sharply than projected around the monetary policy meeting in december. a wide range of instruments is being used in norway to counteract the effects of the financial crisis. in order to curb the fall in activity, government expenditure will be increased by over 10 per cent this year. norges bank ’ s bank lending survey shows that banks have been tightening credit standards substantially, particularly for corporate loans. to boost the credit market a separate government fund will buy private bonds. the government has also provided loans and guarantees for exports and expanded lending limits for the norwegian state housing bank and other special vehicles for government financing. norwegian banks ’ equity capital

no longer a constraint on production. the enterprises in the network are expecting output and employment to fall further over the next six months. unemployment has increased since autumn last year, but is still at historical low levels. unemployment is projected to rise to 4 3 / 4 per cent at the end of the year. wage growth is expected to come down this year from a high level in 2008. lower corporate profitability, rising unemployment and lower consumer price inflation will probably result in low negotiated pay increases this year. the export sector has been particularly hard hit by the global downturn. traditional exports have fallen markedly since autumn last year. a contraction in the world economy will result in a substantial decline in norwegian exports ahead. moreover, due to the marked fall in commodity prices, export prices are now very low. expensive and reduced access to credit, high interest expenses and uncertainty about developments ahead amplified the downturn towards the end of 2008. private consumption fell markedly, the decline in housing investment accelerated and mainland business investment started to fall. the downturn in the world economy and the abnormal conditions in financial markets are expected to continue to mark the norwegian economy ahead. mainland gdp is projected to contract by 1 per cent between 2008 and 2009. norwegian government finances are sound with substantial net wealth, although the surplus will be reduced by the fall in oil prices. the automatic stabilisers in the national budget together with discretionary fiscal policy will stimulate the mainland economy by the equivalent of 5 per cent of gdp from 2008 to 2009. fiscal policy is assumed to become less expansionary between 2010 and 2012. government oil revenue spending is expected to be brought back into line with the fiscal rule when cyclical conditions eventually normalise. we assume that prospects for higher unemployment, a fall in house prices and a high level of debt will induce households to build up financial buffers and reduce debt. the saving ratio is expected to increase considerably. net lending is projected to be positive this year after being negative since 2004. as household borrowing has been considerable in recent years, deleveraging in the household sector is important to long - term stability in the economy. the outlook ahead, and monetary policy assessments in norway, inflation will be curbed by lower capacity utilisation. the marked increase in unemployment now envisaged will result in lower pay increases this year and next. prospects of weaker growth and lower inflation imply a lower interest rate than presented in the interest rate projection from our last forecast in december. there is also a risk that the global down