losses and recorded solid earnings in recent years. furthermore, the norwegian banking system is not large relative to the size of the norwegian economy. in response to the uncertain environment, banks abroad and at home are reluctant to lend to each other and are tightening their credit standards. credit channels are drying up. money market rates have increased markedly, and to levels substantially higher than central bank key rates. the fallout has been particularly pronounced in the us, but european interest rates have also risen sharply. the flow of dollars among banks has seized up at times. other than central bank measures to supply liquidity to banking systems, the authorities in the us and europe first approached the financial crisis as a succession of problems at individual institutions. in the us, a general package was adopted by congress on friday 3 october. usd 700 billion was allocated for purchasing illiquid assets from financial institutions. on 8 october, the uk government announced a number of measures to stabilise financial markets, but with emphasis on providing risk capital. euro area countries followed suit and on 12 october agreed to take similar action. on 12 november, the strategy for the us crisis package of usd 700 billion was changed to provide the authorities with the scope to inject capital into banks and other financial institutions. there is unusually high uncertainty surrounding economic developments ahead. this is reflected in equity markets among other things. since spring, stock indices have plummeted both abroad and on the oslo stock exchange. the oslo stock exchange has declined by more than 50 per cent since the peak in may. on 8 october, the central banks in the us, the uk, canada, the euro area, switzerland and sweden implemented coordinated interest rate cuts. the central bank of china also reduced its key rate. on 29 october, the federal reserve reduced its key rate by a further 0. 5 percentage point. on 6 november, the european central bank and the bank of england reduced their key rates by 0. 5 percentage point and 1. 5 percentage points, respectively. market participants expect key rates to be reduced further among most of our trading partners. norges bank reduced its key policy rate by a total of 1 percentage point to 4. 75 per cent. norwegian money market rates increased markedly as a result of risk premiums abroad spilling over into the norwegian market. the eurodollar market has been a widely used source of financing for norwegian banks. dollars in this market are used to procure nok liquidity and to redistribute liquidity among banks. banks

s assesses the outlook for price inflation and sets interest rates. since 1997, labour costs have increased annually by between 5 and 7 per cent. in spite of this, consumer price inflation has been close to 2½ per cent over the past few years. the krone exchange rate has appreciated as a result of a wider interest rate differential between norway and other countries. combined with low growth abroad and increased trade with low - cost countries such as china, this led to a slower rise in import prices. in norway, voluntary export restraints on clothing have been removed and tariffs on clothing have been reduced considerably. in the eu and the us, a similar tendency has not been seen to the same extent. this may explain why prices for clothing have fallen in norway relative to the eu and the us. however, there is still a long way to go before restrictions on clothing imports to norway are entirely dismantled. for example, there is a duty today on imported children ’ s clothing and on shirts, suits, jackets and trousers for men and boys. as the world economy recovers, import price inflation will edge up. a rise in labour costs of more than 5 per cent will then only be consistent with the inflation target if the krone continues to appreciate. in the long run, wages must be compatible with the value added that is generated by workers, i. e. labour productivity. over time, the increase in real wages is therefore determined by developments in labour productivity. in norway, productivity growth has averaged 1½ - 2 per cent over the last 20 years. if this continues to be the case, an increase in nominal labour costs of around 4 - 4½ per cent in the long term will be consistent with the inflation target. there is an important interaction between monetary policy and fiscal policy. according to the guidelines for fiscal policy, petroleum revenues are to be phased in approximately in pace with the expected real return on the government petroleum fund. this guideline implies that fiscal policy will contribute to stimulating aggregate demand in the norwegian economy every year for many years ahead. the guideline also implies that the use of petroleum revenues will increase as long as the petroleum fund is expanding. variations in oil prices are accompanied by considerable fluctuations in government petroleum revenues from one year to the next. it is important to prevent these fluctuations from spilling over to the mainland economy. public expenditure and taxes that vary in relation to oil prices would result in an unstable economic environment. financial markets would be marked by uncertainty and turbulence, with an increase in