the risk of a downturn increased, particularly in europe. the debt crisis in the euro area made it more difficult and expensive for european banks to procure market funding. norwegian banks were also affected. with a view to countering the higher premiums in the money market and curbing the effects of weaker developments abroad on the norwegian economy, the key policy rate was reduced to1. 75 percent in december. the situation in international financial markets improved in the course of winter. the krone appreciated. on the other hand, growth in advanced economies was weak and euro area gdp fell towards the end of the year. central banks abroad announced that the key rates would be kept at a low level for a prolonged period. at the monetary policy meeting in march, norges bank underlined that weak growth prospects abroad and the strong krone were keeping inflation at a low level and curbing activity in some sectors. the key rate was reduced to 1. 5 percent at that meeting. europe is now in a downturn. many countries are struggling with large deficits and mounting government debt. structural reforms are being implemented, pension schemes are being tightened and tax systems are under review. at the same time, tighter credit standards and increased capital requirements will limit the supply of bank credit. in addition, a number of countries must restore competitiveness after a period of high cost growth prior to the financial crisis. in the short run, the tightening measures pull down activity and push up unemployment. central banks in other countries are using strong measures to prop up activity and inflation. as shown in the chart, key rates among many of our trading partners are close to zero and are expected to remain low for a long period. in the us, uk and japan the central banks have made large - scale government bond purchases in order to push down long - term interest rates. the european central bank ( ecb ) has also stretched itself, for example by providing long - term loans to banks. the ecb operations during winter contributed to boosting liquidity and reducing risk premiums in the european banking system and in the sovereign debt market. bis central bankers ’ speeches financial market turbulence has flared up again recently, with particular focus on the macroeconomic situation and budget developments in spain and other countries in southern europe. the political unrest in greece and growing fears of a greek government debt default have curbed risk appetite in the markets. yields on italian and spanish government bond have increased, while us, uk and german government bond yields have fallen to

historically low levels. international equity indices have declined, particularly in europe. bis central bankers ’ speeches despite a prolonged downturn abroad and financial market turbulence, activity in the norwegian economy is remains robust. capacity utilisation has been close to normal over the past year. gdp for mainland norway expanded by 2. 4 per cent in 2011 according to preliminary figures. prices for norwegian export goods are favourable relative to import prices. the oil and construction industries are booming and both employment and the supply of labour are on the rise. unemployment is low and fairly stable. at the same time, house prices are moving up and household debt is still rising faster than household income. on the other hand, some segments of the export industry are feeling the adverse effects of developments in europe and a strong krone. key policy rate is low because inflation is low and because the downturn abroad and a strong krone are dragging down on growth in some sectors in norway. very low interest rates abroad and high premiums in money and credit markets reinforce this picture. there are unusually wide differences between various interest rates, reflecting the high level of money bis central bankers ’ speeches market and credit premiums. many households are paying up to 4 percent on housing loans and interest rates on corporate loans range between 5 and 6 percent. when setting interest rates, the bank does not give weight exclusively to bringing inflation back to target. weight is also given to the effects of the interest rate on output and employment. at the same time, weight is given to the risk that a prolonged period of low interest rates can lead to elevated risk - taking and excessive debt accumulation in the household and business sector. such imbalances may have spillover effects further ahead, with substantial effects on output and employment. in the march 2012 monetary policy report, norges bank clarified how these considerations are expressed in the bank ’ s response pattern. in that connection, the bank adjusted the criteria to which it gives weight in interest rate forecasting. the key policy rate is set so that inflation is brought back to target. at the same time, inflation targeting is flexible, which means that the path for inflation should be weighed against developments in output and employments. interest rate setting should also be robust. this means that the interest rate should be set so that monetary policy mitigates the risk of a buildup of financial imbalances. normally, the key policy rate cannot achieve several objectives simultaneously. in the case of conflicting objectives, the choice of interest rate path will involve