miguel fernandez ordonez : the biggest risk - complacency address by mr miguel fernandez ordonez, governor of the bank of spain, delivered to the circulo de economia, barcelona, 31 january 2007. * * * i very much appreciate the opportunity provided to me by the circulo de economia to deliver this address at this time, just as the figures for last year have been released. in terms of the spanish economy's performance, the figures speak for themselves and confirm a favourable short - term outlook. against this background, i think it is very important to reflect on the underpinnings of the economy ’ s trajectory, in order to identify those factors that are genuinely relevant for projecting ahead the progress that has been achieved in recent decades. i have therefore thought it best to adopt a long - term approach for this speech, going beyond conjunctural analysis. and with the title i have chosen, i have sought precisely to stress that when things are going well and the outlook is favourable, the biggest risk is complacency. the year 2006 ended in spain with growth at around 3. 8 %, outperforming the seven biggest industrialised countries. this is the first time in many years that this has happened. not only has growth in spain been higher than in the euro area countries, but it has also been higher than in the united kingdom, japan and the united states, which in recent years had been growing at a rate above spain. indeed, on these results, spanish gdp is now ranked seventh among the industrialised countries, in front of canada and only behind the united states, japan, germany, united kingdom, france and italy. comparison with these seven countries can be taken as a basis to give us an idea of our strengths and weaknesses. in terms of job creation, spain was once again prominent in 2006, with a growth rate of 3. 56 %. that ranks us first among the big seven, and if we compare absolute figures ( almost 700, 000 jobs ), no other country in the developed world has created so much employment, with the sole exception of the united states. turning to public finances, spain's end - year surplus also compares very favourably with the deficits posted in the other main developed countries. yet this should not hide the fact that we also ranked first in two unfavourable indicators. true, yearend inflation in spain was 2. 7 %, below the figure

remain consistent with the inflation target. changes in nominal interest rates will then be fully reflected in real interest rates. this makes monetary policy more effective. the changes in norges bank ’ s monetary policy over the past 25 years are largely in line with international developments. in norway, the interest rate was used to stabilise the exchange rate from 1986. capital regulations no longer had the desired effect and were removed. events in international financial markets in the last half of the 1990s led to more pronounced fluctuations in the exchange rate and demonstrated that the exchange rate cannot be finely tuned. high petroleum revenues, fiscal slippage and expectations of an increase in the use of petroleum revenues contributed to eliminating the effect of interest rate policy on wage formation and fiscal policy. the exchange rate was no longer suitable as a nominal anchor. the government laid down new monetary policy guidelines in march 2001. norway ’ s current system of flexible inflation targeting and the objective of inflation over time of 2 ½ per cent is similar to systems in other comparable countries. the oecd countries have placed greater emphasis on inflation targeting through the 1990s. this has had a substantial effect on the largest capital markets in the global economy, i. e. in the eu, the us and japan. capital markets outside these areas are small. however, changes are also being made in monetary policy regimes in a number of emerging markets. one important tendency is that fewer countries operate an exchange rate policy regime where they are free to change the conversion rate to other currencies on their own initiative, so - called “ crawling pegs ”. a number of emerging markets have chosen inflation targeting instead : for example israel, chile, brazil, colombia, korea, thailand, mexico og south africa. other countries, such as china, hong kong and the baltic states, have chosen to continue to use a fixed exchange rate system. the operational target of monetary policy in norway as defined by the government is inflation of close to 2. 5 per cent over time. the inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. the inflation target is also a vehicle for allowing monetary policy to stabilise developments in output and employment. this objective is also expressed in the regulation on monetary policy. high demand for goods and services and labour shortages normally point to higher inflation. when interest rates are increased, demand falls and inflation is kept at bay. when demand is low and unemployment rises, inflation will tend to slow. interest rates will then be reduced