scenario where the central bank does take into account the possible effect of monetary policy on financial stress. when financial turbulence occurs, the economic setback is less pronounced and less prolonged than if the central bank had not taken this risk into account in monetary policy, as illustrated by the blue lines. the benefit gained from keeping the interest rate somewhat higher in the short term is in this case a more stable path for inflation and output over time. this framework is highly stylised. in the actual implementation of monetary policy we are faced with a number of difficulties. first, developments in debt and house prices depend on a number of factors in addition to the interest rate. second, both the costs and the benefits of leaning against the wind are uncertain. what we do know, however, is that the economic consequences of a financial crisis are so serious that an insurance premium is worth paying. let me now return to the norwegian economy and to the trade - offs in recent interest rate setting in norway. as i said earlier, the key policy rate in norway has in recent years been kept slightly higher than implied by medium - term outlook for inflation and output, in order to mitigate the risk of a build - up of financial imbalances. however, through last autumn, oil prices fell sharply and the growth outlook for the norwegian economy weakened. against this background, norges bank cut the key policy rate by 0. 25 percentage point to 1. 25 percent in december last year. weight was given to countering the risk of a pronounced downturn in the norwegian economy. financial stability considerations were not taken off the table, but a new risk had entered the scene. through the following winter months, developments in the norwegian economy were broadly in line with expectations. the effects of the fall in oil prices on the real economy had been relatively small. inflation remained close to 2. 5 percent and unemployment was stable. at the same time, house prices continued to rise rapidly. therefore, balancing of the different kinds of risks – the risk of a pronounced downturn in the economy versus the risk of a build - up of financial imbalances – shifted slightly from december. an overall assessment led norges bank to keep the key policy rate unchanged at 1. 25 percent at the monetary policy meeting in march. however, we also communicated an intention to lower the key policy rate if developments in the economy ahead proved to be broadly as projected. at the same time, norges bank advised the ministry of finance to keep the countercy

##clical capital buffer should be based on the credit gap. chart : basis for advice on the countercyclical capital buffer : key indicators in preparing its advice on the buffer decision, norges bank adds three other variables as key indicators. the three variables are, as shown in the chart : house prices, commercial property prices and banks ’ wholesale funding ratio. together, the four indicators contain a considerable amount of information about how cyclical systemic risk evolves. chart : early warning models for financial crises a number of studies have indicated that credit growth, real estate prices and banks ’ wholesale funding ratio show a systematic pattern ahead of financial crises. at norges bank, we have examined data from 16 oecd countries to see whether such a systematic pattern exists. 2 we have developed empirical models for estimating the probability of a crisis. the model - based predictions can be interpreted as the probability that the economy is in a precrisis period. the chart shows estimated crisis probabilities for the us, spain, norway and the uk. the band reflects various combinations of explanatory variables and trend estimation methods. 3 the dataset covers the period from 1970 to 2013, with a total of 27 events defined as crises, of which 11 are associated with the financial turmoil in 2008 – 2009. as you can see from the chart, the estimated probability of a crisis increased markedly in the years ahead of the financial crisis in 2008 – 2009, although the uk is the exception in that context. crisis probabilities also increased in the us ahead of the us savings and loan crisis, in the uk ahead of the uk ’ s small - bank crisis and in norway ahead of the banking crisis in the late 1980s and early 1990s. all these episodes featured rapid growth in credit and rising real estate prices. see anundsen, a. k., f. hansen, k. gerdrup and k. kragh - sørensen ( 2014 ) : « bubbles and crises : the role of house prices and credit », norges bank working papers 14 / 2014. the indicators are incorporated in growth form or as deviations from estimated long - term trends. bis central bankers ’ speeches the empirical results support our choice of key indicators of financial imbalances. household and corporate credit, house prices and banks ’ wholesale funding ratio are statistically significant in the models and clearly influence the estimated probability of a crisis. the results also indicate that a low equity ratio in the banking sector can