must react when inflation rises. if households and firms become accustomed to the high level of inflation and it becomes embedded in their price and wage - setting behaviour, inflation may become entrenched. if foreign exchange market participants lose confidence that inflation will move down to target, the krone may depreciate. despite the substantial increase in the policy rate in response to high inflation, the krone has depreciated quite a bit over the past year. part of the explanation is probably that interest rates have risen more in many trading partner countries. in recent years, the pandemic, war and high inflation led to heightened economic and political uncertainty, and market volatility has increased. these factors have also likely contributed to the krone depreciation. even though the krone is influenced by a host of factors, this does not mean that interest rate setting in norway is not important. if we had not raised the policy rate in response to higher inflation, the krone would probably have been considerably weaker. norges bank does not have a policy target for the krone exchange rate. we are nevertheless concerned with the exchange rate as it has an influence on inflation. first, a weaker krone will push up inflation because it increases the prices for imported goods. in addition, a weaker krone may improve trade - exposed industries'ability to pay. 4 / 6 bis - central bankers'speeches with a floating exchange rate, we are not bound to maintain the same interest rate level as our trading partners. the floating krone exchange rate has acted as a buffer against downturns in the norwegian economy. in periods when oil prices have fallen and the economy turned down, the krone has depreciated and contributed to strengthening competitiveness. with a fixed exchange rate, more of the adjustment would have had to come via lower wages and prices. in that case, activity and employment could have fallen more. in today's situation, a weaker krone makes managing the monetary policy trade - offs more demanding. inflation is already high, and the depreciation of the krone is contributing to keeping inflation elevated. at the same time, the economy is cooling down. slide 8. wide differences across industries when setting the policy rate, we rely on extensive information and analyses prepared by norges bank's staff economists. one important source of information is our regional network of firms. every year we talk to 1800 firms in different industries and parts of the country about their respective situation and

prospects. this gives us a good picture of the state of the norwegian economy. after a period of high activity and little spare capacity, the network now reports weak overall economic growth. at the same time, there are wide differences across industries. while companies supplying goods and services to the petroleum industry are enjoying strong growth, the construction industry is experiencing a decline in activity. few new homes are being built. in the secondary housing market, many homes have not been sold, and house prices have fallen. we cannot use the policy rate to fine - tune developments in individual sectors. at the same time, we are attentive to industries that stand out. a sharp upswing or decline in some industries may have substantial spillover effects or more lasting effects that may change the economic outlook. this may then also have implications for the orientation of monetary policy. slide 9 : the policy rate is likely close to the level needed to tackle inflation monetary policy is now having a tightening effect on the economy, and we have not yet seen the full effects of the past rate hikes. the committee assesses that the policy rate is likely close to the level needed to tackle inflation. at our monetary policy meeting in november, we signalled that we will probably raise the policy rate in december, and we believe there will likely be a need to maintain a tight stance for some time ahead. there is substantial uncertainty surrounding economic developments. over the past couple of years, inflation has repeatedly been underestimated, and we have had to revise up our policy rate forecasts. it is demanding to make economic forecasts – particularly now that the economy has been exposed to major shocks, and because we have little experience of the current high inflation. i cannot therefore make any promises about the interest rate outlook. what i can promise is that we will adapt monetary policy to the economic outlook. with effective 5 / 6 bis - central bankers'speeches interaction between wage determination, fiscal policy and monetary policy, we are well poised to return inflation to target while avoiding a severe economic downturn. 6 / 6 bis - central bankers'speeches