øystein olsen : management of the government pension fund global 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, 25 april 2019. * * * please note that the text below may differ from the actual address. the government pension fund global and the fiscal rule have long been important pillars of economic policy in norway. substantial portions of government petroleum revenues have been transferred to the gpfg. the resulting capital has been broadly spread across equities, bonds and real estate and has provided good returns and well - diversified risk. according to the annual report on the management of the gpfg, total return before management costs came to – 6. 1 percent in 2018. the return on the gpfg in 2018 was the second lowest since 1998. the equity portion has increased over time, and the return on equities now has a greater impact on total return than earlier. the negative return reflects the sharp decline in equity markets towards the end of 2018. the investments in gpfg have a long time horizon. the annual return over the 1998 – 2018 period was 5. 5 percent. the annual net real return, ie adjusted for inflation and net of management costs, came to 3. 6 percent in the same period. norges bank manages the gpfg with the objective of achieving the highest possible return over time, within the mandate defined by the ministry of finance. the gpfg is to be managed within an adequate control and risk management framework and in a responsible and efficient manner with a high degree of transparency. the bank pursues a variety of investment strategies. the strategies are complementary and aimed at delivering good returns over time. in 2018, the return was 0. 3 percentage point lower than the gpfg ’ s benchmark index. over the whole period since 1998 when norges bank established norges bank investment management ( nbim ), the annual return has been 0. 25 percentage point higher than the return on the benchmark index set by the ministry of finance. a cost - efficient management operation contributes to the aim of highest possible return. management costs are low, measured as a share of capital under management and compared with other managers. in 2018, the return was weak both in absolute terms and relative to the benchmark index. in 2017, the return was 13. 7 percent, as much

in turn curbs the rise in prices and wages. higher interest rates also make it more attractive to take krone positions and borrow in foreign currency. as a result, higher interest rates normally lead to an appreciation of the krone. this reduces prices for imported goods. in addition, a strong krone curbs activity, profitability and the capacity to cover labour costs in the internationally exposed sector. implementation of monetary policy • if it appears that inflation will be higher than 2½ per cent, with unchanged interest rates, the interest rate will be increased. • if it appears that inflation will be lower than 2½ per cent, with unchanged interest rates, the interest rate will be reduced. • it is just as important to avoid a rate of inflation that is too low as it is to avoid a rate that is too high. fafo og makt - og demokratiutredningen 6. september 2002 the mandate implies that the interest rate must be adapted to the outlook for the norwegian economy. if it appears that inflation, with unchanged interest rates, will be higher than 2½ per cent, the interest rate will be increased. if it appears that inflation, with unchanged interest rates, will be lower than 2½ per cent, the interest rate will be reduced. this orientation of monetary policy will normally also contribute to stabilising production and employment. monetary policy functions with considerable and variable lags. the current inflation rate does not provide sufficient information to determine the level at which interest rates should be set now. our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. two years is therefore a reasonable time horizon for attaining the inflation target. it is nevertheless conceivable that in a situation with a high rate of inflation and weak economic developments, norges bank may decide to apply a somewhat longer time horizon than two years to reach the target of 2½ per cent. nor do we need to be in any hurry to raise the level of inflation in a situation where inflation is very low, while economic activity is high. by influencing inflation over time, monetary policy will not in itself cause unnecessary disturbances in the economy. a precondition for applying a longer time horizon is that financial market participants have strong confidence in low and stable inflation over time, and that wage formation has a nominal anchor. flexible inflation targeting provides a framework for the use of monetary policy instruments that both ensures that the economy has a nominal anchor and allows monetary policy to smooth