in norway will be between 2½ percent and 3½ percent in the coming years. the associated neutral nominal key policy rate is somewhat lower. 1 the low level of the neutral interest rate raises a number of issues. today, i would like to focus on two aspects that have been given weight in recent years in norges bank ’ s assessment of a robust interest rate path. the first is that the effect of changes in the policy rate tends to be more uncertain when the rate is very low. the second relates to the challenge persistently low interest rates pose to financial stability. greater uncertainty about the effect of the policy rate monetary policy decisions are made under uncertainty. central banks operate in an environment of uncertainty regarding the current situation, the driving forces in the economy and the functioning of the economy. much of this uncertainty is associated with conditions beyond the influence of monetary policy. for norway, these conditions include the oil price and economic developments among trading partners. these variables are treated as exogenous factors in our analysis. however, the uncertainty associated with the effect of monetary policy is of a different nature in that it relates to the functioning of the economy – and the effect of the policy rate in particular. chart : norway – interest rates for the transmission mechanism of monetary policy to function normally, changes in the policy rate must pass through to the bank lending and deposit rates faced by households and enterprises. in norway, the latest policy rate cuts have had a broad impact on banks ’ interest rates. lending and deposit rates for households are both approximately one percentage point lower now than when the key policy rate was reduced in december 2014, from a level of 1. 5 percent. rates facing enterprises have also fallen. banks ’ profitability and net interest income have remained solid in the same period. at the same time, given the current low interest rate level, we are navigating in uncharted waters. banks ’ response to changes in the policy rate may differ from their usual behaviour. households 2 / 5 bis central bankers'speeches and enterprises may also respond differently to interest rate changes when interest rates are already at a low level. so far, there is no clear indication that historical relationships have collapsed, but nor do we have experience with such low interest rates over such a long period of time. it may also be difficult to predict financial market reactions to very low and negative real interest rates. as early as 1967, us economist william brainard discussed how central banks should respond to economic shocks when there is uncertainty about the

##ges bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. with confidence in the inflation target among economic agents, monetary policy in norway has been able to contribute to stabilising the business cycle. lower income from oil exports following the fall in the oil price meant cost - competitiveness needed to improve. a floating exchange rate greatly facilitated this process. in the aftermath of the oil price fall, the krone exchange rate tracked the oil price and wage settlements remained moderate. with inflation expectations well anchored, the bank ’ s target rate could be reduced, thus underpinning a weaker krone. as a result, relative labour costs declined markedly, strengthening the position of norwegian firms exposed to international competition. over time this could enable new exports to emerge as the production of oil and gas dwindles. over the past few quarters, growth has picked up, the labour market has improved and 1 / 2 bis central bankers'speeches unemployment has fallen. the policy mix has played an important role, helped by a recovery of the oil price. competitiveness in the oil service industry has also improved considerably, particularly after the substantial cost - cutting measures introduced by companies in this industry in recent years. with a floating exchange rate, domestic interest rates can differ from external interest rates, but an interest rate differential that becomes too wide can have a substantial effect on the exchange rate, generating instability in inflation, output and employment. thus, the domestic interest rate will also be influenced by external rates to a large extent under an inflation - targeting regime. this was illustrated by a positive, but limited, interest rate differential in the first years following the global financial crisis, when the effect on norway ’ s economy was less severe than for most other european economies. this allowed monetary policy to respond to the economic downturn that followed in the aftermath of the fall in oil prices. the key policy rate was lowered and has been kept at 0. 5 percent since march 2016. our experience has shown us the crucial importance of flexibility in inflation targeting in enabling us to make the appropriate trade - offs in response to shocks to the economy. the time horizon for achieving the target must be sufficiently long, and the balance of risks, including risks related to financial stability, must be taken into account. the past couple of years have been demanding for the norwegian economy, and the transition towards being less oil - dependent is ongoing. new sectors must grow to offset the downturn in petroleum -