a necessary policy adjustment later could be far more painful. monetary policy central banks in other countries are deploying strong measures to buoy up economic activity and inflation. key interest rates in many countries are close to zero. central banks in the us, uk and japan have made large - scale bond purchases and thereby expanded their balance sheets in order to push down long - term interest rates. it is likely that the sharply expanded access to long - term liquidity from the european central bank ( ecb ) has reduced the risk of a banking crisis in the euro area. at the same time, ecb measures have contributed to stabilising government bond markets, and short - term funding costs for italy and spain have declined. bis central bankers ’ speeches chart 9 the eu is working on measures to restore financial market confidence – and public confidence. greece has reached an agreement with its private creditors on a substantial debt restructuring. on this basis, euro area heads of state or government have approved a new loan package for greece. banks have been instructed to increase their core capital. chart 10 bis central bankers ’ speeches the norwegian economy is still well equipped to withstand the negative effects of the financial crisis. oil prices are high, contributing to norway ’ s favourable terms of trade. growth is being sustained by high activity in the oil industry. we have room for manoeuvre in economic policy. however, a number of enterprises are feeling the impact of the downturn abroad. some segments of the export industry are feeling the effects of lower turnover and a strong krone. a high level of uncertainty is causing households and enterprises to be more cautious in their consumption and investment decisions. at the same time, house prices and household debt are still rising. capacity utilisation in the norwegian economy is now near a normal level. growth in mainland gdp is projected at about 3 percent this year and in the years ahead, broadly in pace with potential output growth. chart 11 the operational target of monetary policy is annual consumer price inflation of close to 2. 5 percent over time. recently, inflation has been low, close to 1 percent. inflation will be brought back to target, but how long this will take depends on the disturbances to which the economy is exposed and their effect on the prospects for the path for inflation and the real economy ahead. when setting the key policy rate, we do not exclusively assign weight to bringing inflation back to target, but we also take into account the impact of the interest rate on output and employment. the inflation

years will be counterbalanced by good years ahead. but changes in the global economy affect the growth outlook and the balance of risks, and hence financial market returns as well. chart 7 bis central bankers ’ speeches the yield on the presumably safest long - term government bonds can provide a basis for estimating the return on the fund. returns exceeding this will reflect the risk we are willing to take. in 2001, real interest rates on long - term government bonds averaged around 3 percent internationally. real interest rates have since fallen and long - term real interest rates are now at a historical low of between 0 and 1 percent. over time, we expect equities to yield a higher return than bonds. over the past few years, the fund has increased its allocation to equities, compensating to some extent for low bond yields. however, the excess return on equities must be considerable to keep up the overall return on the fund. this is not impossible, but perhaps more than we can expect. a bolder investment strategy could compensate for low interest rates, although the risk of substantial losses would also increase. this is not a path we are likely to take. table 1 the fiscal rule was drawn up in 2001. today, the situation is different. in 2001, a real return on the fund of 4 percent, or a little higher, based on the then prevailing distribution between equities and bonds, was a reasonable assumption. today, calculations yield a lower figure for expected real return. 1 the real return on bonds in the fund ’ s portfolio can now be estimated at 1 percent. with a normal risk premium on equities, the real return on the whole fund can be quantified at 3 percent. there is a possibility that the real return will be higher, but it may also be lower. if we spend more than the annual return on the fund, we will be eating into the savings portion. the conclusion is that a more robust approach would now be to base fiscal policy on an annual expected real return on the fund of 3 percent. such an adjustment would underpin the main principles that were behind the establishment of the fiscal rule – stability and sustainability. see norges bank staff memo 6 / 2012. bis central bankers ’ speeches chart 8 in 2011 the structural non - oil budget deficit was about 3 percent, which is close to such a new path. adapting petroleum revenue spending to a lower expected return should not therefore be particularly demanding. if we wait,