ida wolden bache : norges bank's management of the government pension fund global introductory statement by ms ida wolden bache, governor of norges bank ( central bank of norway ), at the hearing of the standing committee on finance and economic affairs of the storting ( norwegian parliament ), oslo, 18 april 2023. * * * thank you for the invitation and for the opportunity to talk about norges bank's management of the government pension fund global. 2022 saw substantial movements in global financial markets. interest rates rose, and both equity and bond markets gave negative returns. the fund's return last year was equivalent to a drop in value of nok 1 637 billion. in absolute terms, this is the weakest return in the fund's history. with such a large fund and an equity allocation of 70 percent, we need to be prepared for substantial fluctuations in returns the objective for norges bank's management of the fund is the highest possible longterm return within the constraints set by the ministry of finance. the ministry has defined a benchmark index for the fund, and we manage the fund close to this index. over time, the return on the fund has been higher than the return on the benchmark index. the executive board is satisfied with this. the excess return in 2022 was equivalent to nok 117 billion. the executive board has overriding responsibility for norges bank's management of the fund. we adopted a new strategy for the management of the fund towards the end of 2022. i would like to single out three key aspects of this strategy. we will emphasise exploiting the bank's characteristics as a large and long - term investor in order to achieve the objective of the highest possible return. norges bank is able to make investments whose underlying value may take a long time to realise. a long - term investment horizon also means that we can invest differently to many other investors, even in difficult and illiquid markets. the fund's size enables us to explore new ways of investing at little additional cost. as a large, active and long - term participant in capital markets, the bank is an attractive investor and partner. in unlisted markets, this may open up opportunities unavailable to others. we will set great store by being a responsible investor. responsible investment and active ownership support the objective of the highest possible return. transparency about this work is important, and we expanded our reporting in this area in

those who experienced the banking crisis in the 1990s have a clear perception of this. financial instability is characterised by wide fluctuations in prices for assets, such as dwellings, commercial property and securities or failure in the functioning of financial institutions ( a “ run ” on banks ) or financial markets. financial instability is also characterised by disturbances in credit availability or the flow of capital. this may have consequences for output, employment and for inflation. financial stability therefore promotes price stability. in tandem with the trend towards lower inflation since the mid - 1980s, asset prices have shown wider variations and financial crises have become more frequent. in the short term, a conflict may arise between achieving the inflation target and financial stability. in japan, equity and property prices increased sharply in the 1980s, while inflation was subdued. in the us, household and corporate debt rose fairly sharply and equity prices trebled between 1994 and 1999, while inflation was moderate. this has prompted a debate as to whether monetary policy must take financial stability into account to a greater extent. low interest rates and low inflation may contribute to a rise in asset prices and debt build - up ( financial bubbles ) through several channels. with confidence in the inflation target, inflation may be less affected by changes in the economic situation. increased international competition and imports from low - cost countries can keep inflation at a low level even during a period of strong expansion in the domestic economy. high productivity growth contributes to low inflation, but also to high earnings. banks will then record low losses and may increase their lending. investments financed by loans may push up property prices. when the bubbles burst, either in the housing market or in the stock market, asset prices fall and many will want to reduce their debt. this reduces demand and may lead to a fall in prices. deflation in japan is clearly related to the property and stock market bubble that burst in the early part of the 1990s. the build - up of financial bubbles may make the financial sector more vulnerable to any disturbances in the economy at a later stage. a sharp rise in asset prices and debt build - up may pose a risk to economic stability. in order to reduce this risk it will in certain situations be appropriate to apply a somewhat longer horizon than the normal time horizon of two years for achieving the inflation target. this presupposes that financial market participants are confident that inflation will be low and stable over time. norges bank has stated that if it is necessary to deviate from the normal response pattern in order to promote financial stability,