, the financial turbulence, if it gained momentum, could have a severe impact on the global economy and our exports. then, in autumn 2008, the turbulence led to a synchronised financial and real economic crisis in virtually every country in the world. as a result, output and employment are falling, and norway is no exception. the way forward since then, the authorities in many countries have shown that they are prepared to use powerful tools to fight the crisis, but financial markets are still under stress. the crisis of confidence and credit rationing are leading to a decline in output. corporate earnings are falling across the board and the number of unemployed is rising, prompting new rounds of losses on securities and in banks ’ books. every week there is a news story conveying the impression that the action being taken is not enough to stave off the downturn. but the measures being implemented are indeed having an effect. the flow of liquidity has improved slightly, and interbank rates have fallen. in the us and europe, these rates were more than 2 percentage points above the key rate in october last year, but now the gap has been halved. as a result, the low rates set by central banks are having a greater effect. in the us, mortgages and corporate loans have become cheaper after the federal reserve began to purchase bonds and commercial paper issued by mortgage banks and firms. in germany, sweden and denmark, mortgage rates have decreased markedly. and in norway, borrowing rates have fallen and credit to homebuyers is flowing again. equity and commodity prices are still fluctuating widely, but the decline is no longer steep. lower key rates, higher public expenditure and reduced taxes will push up demand for goods and services, gradually stabilising output and employment and preventing inflation from becoming too low. there are also strong self - regulating mechanisms in market economies that can easily be underestimated when times are at their bleakest. corporate profitability is being squeezed, but the rise in unemployment will result in lower wage growth, which will curb the impact on earnings. investment is falling sharply, but there will in time be a need for new houses and commercial buildings and to replace obsolete machinery. households all over the world are now increasing their saving and reducing debt. when debt eventually reaches a sustainable level, consumption will pick up. low interest rates curb the decline in investment and make it easier for households to repay debt. the change in behaviour can nevertheless take time and we cannot expect consumers in

refers to the value of the krone. stability in the krone ’ s internal value implies that inflation must be low and stable. low and stable inflation contributes to economic growth and to stability in financial and property markets. the regulation also states that monetary policy shall be aimed at stability in the norwegian krone ’ s external value, contributing to stable expectations concerning exchange rate developments. norges bank has not set a specific target for the level of the krone exchange rate. with open trade with other countries and free capital movements, we do not have the instruments to fine - tune the krone exchange rate. the task of monetary policy is to provide a nominal anchor. the inflation target is such an anchor. stable inflation expectations can contribute to more stable expectations concerning the krone, but the rise in public expenditure and in prices for internationally traded goods also affect economic agents ’ expectations as to the krone exchange rate. our interpretation of the mandate is included in the inflation report. an account is also given of how different developments, including movements in the exchange rate, will affect the monetary policy outlook. over time, the real exchange rate will be determined by conditions other than monetary policy. the real exchange rate may be measured in a number of ways : for example, by relative consumer prices and relative labour costs between norway and its trading partners, measured in a common currency. the real exchange rate has fluctuated considerably and has at times deviated substantially from the average level since 1970. nevertheless, there has been a tendency for the real exchange rate to revert to this level. the cost level in the norwegian economy compared with our trading partners rose sharply when the oil age began. since then, the level has fluctuated to a certain extent without showing a clear upward or downward tendency. over time, the level has been adjusted to the use of petroleum revenues. when we subsequently arrive at the point where the portion of our import requirements that can be financed by petroleum revenues starts to diminish, norwegian competitiveness will have to be improved. prize - winning research conducted by farooq akram ( “ oil wealth and real exchange rates ; the feer for norway ”, norges bank working paper 2004 / 16 ) shows that the real exchange rate may have to revert to the levels prevailing at the end of the 1960s, before norway became an oil nation. such a depreciation can be achieved either through price and wage inflation that is lower in norway than in other countries or through a depreciation in