øystein olsen : the conduct of monetary policy introductory statement by mr øystein olsen, governor of norges bank ( central bank of norway ), at the hearing before the standing committee on finance and economic affairs of the storting ( norwegian parliament ), oslo, 21 may 2013. * * * please note that the text below may differ from the actual presentation. i would like to thank the chairman of the committee and thank you for this opportunity to report on the conduct of monetary policy in connection with the storting ’ s deliberations on the government ’ s financial markets report. my statement here today is based on the bank ’ s annual report, but also on the executive board ’ s assessments for the period to the most recent monetary policy meeting and new information. when i was here last year, the key policy rate had been reduced by 0. 25 percentage point to 1. 5 percent in march. the key policy rate has since been kept unchanged. the key policy rate is low because inflation is low and because external interest rates are at very low levels. the year 2012 was characterised by weak growth among norway ’ s trading partners and turbulence in financial markets. uncertainty about global economic developments, particularly in europe, was high. key rates in many countries were close to zero, and both the european central bank ( ecb ) and the federal reserve announced that key rates would be kept low for a long period. economic developments in many advanced economies remained weak into 2013. global growth is being driven by rapidly growing emerging economies. in the euro area, activity has slowed in several of the largest economies, and there are prospects that the downturn may persist for somewhat longer than previously envisaged. unemployment is high and rising in a number of countries. in spain and greece, unemployment now exceeds 25 percent, and among young people, more than half are jobless. the economic situation is better in the us, but growth is moderate. oil prices have fallen somewhat in the course of spring, but are still at a high level. with key rates close to zero, several central banks have adopted unconventional measures to stimulate growth and support inflation. measures that change the composition and size of a central bank ’ s balance sheet differ from the usual monetary policy operations in that instruments other than the key rate are deployed to influence market rates and economic activity. the ecb and the central banks in the us, the uk and japan have implemented such balance sheet policies to directly influence long - term interest rates and

##ical capital buffer will come on top as a capital requirement that can be increased in good times and removed in bad times. the countercyclical buffer is to consist of common equity tier 1 capital and will normally be set between 0 and 2. 5 percent of a bank ’ s riskweighted assets. the countercyclical buffer is intended to counteract the procyclical effects of substantial changes in credit and asset prices. the buffer will help contain the risk of deleveraging in bad times. but an increase in the buffer can also dampen rapid credit growth in good times. the effect will depend on banks ’ reaction when the buffer is increased. norges bank will have primary responsibility for elaborating the basis for decisions on the countercyclical capital buffer. in drawing up the basis, the bank will collaborate and exchange relevant information with finanstilsynet ( financial supervisory authority of norway ). the buffer will be set by the ministry of finance. once the regulation is in place, most likely in late summer, norges bank will issue concrete advice to the ministry of finance on the level of the buffer. thereafter, the bank will issue bis central bankers ’ speeches advice on the buffer four times a year. the criteria on which the bank ’ s advice is based were presented in the march monetary policy report. norges bank will present analyses and issue advice on the size of the countercyclical capital buffer in conjunction with the decision basis for monetary policy. the aim is to ensure that the analytical basis is consistent with the formulation of monetary policy. the objectives of the countercyclical capital buffer and the key policy rate are different. the objective of the buffer is to strengthen banks ’ resilience to losses in an economic downturn, while the objective of monetary policy is low and stable inflation over time. the inflation target is weighed against the aim of smoothing fluctuations in output and employment. the new instrument will be taken into account in monetary policy. both the key policy rate and the buffer work through banks ’ responses. the buffer will be set on the basis of an assessment of the risk that financial imbalances may trigger or amplify an economic downturn. capital adequacy requirements, and their effect on bank lending rates, will be one of many factors underlying the monetary policy analysis and interest rate setting. the countercyclical capital buffer will strengthen the resilience of the banking sector during an upturn. it may also,