or if the krone appreciates markedly, inflation may be lower than projected. the uncertainty surrounding the interest rate ahead is illustrated by the shaded areas in the chart. the government pension fund – global now, let me turn from the financial turmoil and economic developments in norway to the government pension fund – global and the issue of sovereign wealth funds. over the past year, we have seen a growing international debate about government - owned investment vehicles ; so - called sovereign wealth funds ( swfs ). the increased attention reflects their rapid growth over the last decade. the debate has revealed some scepticism towards these funds, where key concerns relate to a lack of transparency and possible nonfinancial investment objectives. in my view, the debate should also reflect these funds ’ potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. typical features of this type of funds are long investment horizons, no leverage and no demands for the imminent withdrawal of funds, unlike the growing number of leveraged hedge funds with short time horizons. hence, sovereign wealth funds have a high risk - bearing capacity and are resilient to short - term volatility. they may therefore act as a stabilising factor in financial markets by dampening asset price volatility and liquidity risk premiums. let me elaborate and exemplify this by looking at the government pension fund – global : the pension fund is a policy tool to support long - term management of norway ’ s petroleum wealth and avoid the resource curse. an important objective is to shield the norwegian economy from fluctuations in prices and extraction rates in the petroleum sector. the fund is only invested abroad in financial markets. the alternative to an oil fund would have been to regulate the extraction path by putting a conservative upper limit on annual extraction. by setting up the pension fund, we have separated the extraction of oil and gas from the actual spending of the petroleum revenues. this has probably resulted in higher production of oil and gas over the past two decades. the pension fund was formally established in 1990, but it was not until 1996 that the first allocation – nok 2 billion – was made to the fund. since then, it has grown to around nok 2 trillion ( well above usd 350 billion ). the fund is fully integrated with the government budget, and the same priorities are imposed on spending from the fund as on any other government spending. this means that the entire petroleum revenues, as well as the return, go into the fund. then

a number of channels. when interest rates rise, it becomes more costly to take up loans and more profitable to save and to postpone consumption and investment. a rise in interest rates will also reduce demand, because the value of houses, leisure homes, cars and shares decreases. household wealth declines. a rise in interest rates may also strengthen the krone. a stronger exchange rate will curb the rise in prices for imports, which directly and indirectly account for 40 per cent of goods and services in the consumer price index. a stronger krone weakens earnings and reduces activity in enterprises in the internationally exposed sector. this has an impact on enterprises ’ capacity to pay, wage growth and price inflation. we do not expect a change in interest rates to have an immediate effect on inflation. our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. hence, the key rate is set with a view to achieving an inflation rate of 2½ per cent two years ahead. the social partners will take account of the inflation outlook in their wage negotiations. if there are prospects of higher inflation, the nominal wage increases will be higher. at the same time, higher wage growth means higher inflation. developments in the labour market and wage formation are therefore important for interest rate setting in norges bank. it is also important to be aware that developments in labour costs may influence inflation, growth and employment differently in a system with a floating exchange rate that in a system with a fixed exchange rate. in our open economy, with a floating exchange rate, it can be assumed that an increase in wage growth of one percentage point without any monetary policy response will gradually translate into a corresponding increase in price inflation unless wage increases are anchored in higher productivity. when norges bank concludes that the key rate should be changed, the change will in most cases be made gradually. this is because there is normally uncertainty about the situation in the economy, potential disturbances to the economy and how fast an interest rate change will affect price inflation. but we will not always take a gradualist approach. a rapid and pronounced change in the interest rate is appropriate if, for example, heightening turbulence in financial markets or a cost - push shock resulting from negotiations indicates that confidence in monetary policy is in jeopardy. norges bank analyses the inflation outlook in separate inflation reports, which are published three times a year. further assessments are presented every sixth week in connection with the executive board's monetary policy meetings. higher interest rates curb demand for