jarle bergo : monetary policy challenges and experiences in norway speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), for the norwegian shipping club, oslo, 4 september 2006. please note that 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 16 august, inflation report 2 / 06 and on previous speeches. * * * introduction monetary policy in norway is oriented towards low and stable inflation, with annual consumer price inflation of close to 2. 5 per cent over time. in its conduct of monetary policy, norges bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. monetary policy functions through an interaction with other components of economic policy. among other things, this interaction must take into account that the norwegian economy is exposed to strong external influences, particularly through developments in oil and gas prices. oil gives us an economic asset that is not available to many other countries, but it also poses considerable challenges. first, when oil is extracted and sold, our national wealth is transformed from petroleum wealth into financial assets. norway ’ s national wealth belongs not only to our generation, but also to future generations. the authorities must therefore exercise fiscal discipline, taking into account long - term considerations. moreover, the size of the cash flow from petroleum activities varies considerably. if petroleum revenues were to be used as they accrue, this would lead to wide fluctuations in demand in the norwegian economy and thereby amplify cyclical fluctuations. third, the use of petroleum revenues will have an impact on competitiveness in norwegian business and industry. a high level and wide fluctuations in the use of petroleum revenues will have a negative impact on the operating parameters for internationally exposed industries. the challenges associated with the emergence of the petroleum sector have contributed to the development of the four main pillars of norway ’ s economic policy, which were established in the 1990s and in 2001. the pillars are : the oil fund mechanism, the fiscal rule, a floating exchange rate and inflation targeting. the government petroleum fund was established in 1990 with a view to safeguarding long - term considerations in the use of petroleum revenues. the first allocation to the fund was made in 1996, and the market value of the government pension fund – global, as the fund is now called, had reached over nok 1500 billion at the

speech higher policy rate will curb inflation introductory statement by governor ida wolden bache at press conference following announcement of the policy rate and publication of monetary policy report 3 / 22 chart 1 policy rate raised norges bank ’ s monetary policy and financial stability committee decided to raise the policy rate from 1. 75 % to 2. 25 % at its meeting on 21 september. the policy rate will most likely be raised further in november. norges bank ’ s task is to keep inflation low and stable. the operational target is inflation of close to 2 percent over time. we are also mandated to help keep employment as high as possible and to promote economic stability over time. we are raising the policy rate with the aim of bringing down inflation. price stability is important for the economy to function well. it reduces uncertainty and facilitates planning. those with low incomes and small margins are normally the hardest hit when inflation suddenly surges. the main contribution monetary policy can make to promoting high employment over time is to ensure low and stable inflation. as long as there is confidence that inflation will remain low and stable, the costs of minor deviations from the target of 2 percent are fairly insubstantial. but if households and firms expect inflation to be elevated and high inflation is incorporated into price and wage setting, inflation may take root, and bringing it down again could prove difficult. chart 2 : inflation is high consumer price inflation is now rising rapidly both globally and in norway. inflation in many countries is the highest seen in decades, and central banks in many trading partner countries have responded by raising their policy rates substantially over a short time. in norway, inflation is markedly above our 2 percent target. twelve - month consumer price inflation was 6. 5 percent in august, far higher than we expected before summer. prices for electricity and other energy products have risen to historically high levels. but prices for a range of other goods and services are also rising faster than normal. the consumer price index adjusted for tax changes and excluding energy products - the cpi - ate - was 4. 7 percent higher in august this year than one year earlier. prices for both imported goods and domestically produced goods and services are rising at a fast pace. we project that inflation will remain higher for longer than envisaged in june. the tight labour market has contributed to pushing up wage growth. there are signs of higher electricity prices ahead than anticipated earlier, and we expect firms to pass on some of the cost increase to selling prices. we also believe it will take