spending as a share of the economy will remain approximately unchanged in the years ahead. this will entail lower growth in public demand than in recent years. at the same time, monetary policy continues to be expansionary. according to norges bank ’ s march 2017 forecast, the key policy rate will remain close to today ’ s level in the years ahead, followed by a gradual rise from 2019. chart : key policy rate and inflation ahead in 2016, the pace of consumer price inflation was at its highest for many years, driven to a great extent by the considerable depreciation of the krone up to the beginning of last year. inflation has slowed since last summer and our projections in the march monetary policy report indicate that inflation will slow further in the years ahead. at the same time, inflation expectations seem to be firmly anchored. the upturn in the real economy appears to have taken hold and unemployment has declined. with a key policy rate close to today ’ s level, there are prospects that inflation will pick up again further ahead. the ministry of finance is currently assessing the need to modernise the regulation on monetary policy. after more than fifteen years, this is a natural step. based on our experience over this period, it is norges bank ’ s assessment that the monetary policy framework has worked well. inflation has been predominantly low and stable since inflation targeting was introduced in 2001. average annual consumer price inflation has been close to, albeit somewhat below, 2. 5 percent. at the same time, employment has consistently been more stable since 2001 than in previous periods, in spite of the fact that the norwegian economy has been exposed to substantial shocks. chart : inflation the inflation target has anchored inflation expectations. at the same time, there has been sufficient room for flexibility and the exercise of judgement to enable monetary policy to dampen the impact on output and employment when the economy has been exposed to shocks. our experience has shown us the crucial importance of flexibility in inflation targeting to enable us to make the appropriate trade - offs in response to these shocks. the time horizon for achieving the target must be sufficiently long, and the balance of risks, including risks related to 3 / 4 bis central bankers'speeches financial stability, must be taken into account. we have also experienced the important role the exchange rate has played as shock absorber, particularly during the financial crisis and in periods of falling oil prices. at the same time, the interest rate level abroad places limitations on the room for manoeuvre in monetary

like traditional commercial banks – an important locus of maturity transformation, which in turn led to both an expansion and alteration of traditional money markets. ultimately, there was a vast increase in the creation of so - called cash equivalent instruments, which were supposedly safe, short - term, and liquid. when, in 2007, questions arose about the quality of some of the assets on which this intermediation system was based – notably, those tied to poorly underwritten subprime mortgages – a classic adverse feedback loop ensued. investors formerly willing to lend against almost any asset on a short - term, secured basis were suddenly unwilling to lend against a wide range of assets. liquidity - strained institutions found themselves forced to sell positions, which placed additional downward pressure on asset prices, thereby accelerating margin calls on leveraged actors and amplifying mark - to - market losses for all holders of the assets. the margin calls and booked losses would start another round in the adverse feedback loop. in short, the financial industry in the years preceding the crisis had been transformed into one that was highly susceptible to runs on the short - term, uninsured cash equivalents that funded longer - term extensions of credit. 2 designing and implementing a policy response in light of the vulnerabilities of short - term wholesale funding markets that were revealed in the 2007 – 09 crisis is an integral part of post - crisis reform. the key question is how to balance the important role these markets have come to play in funding economic activity with the need to contain the destabilizing risks of runs in these same markets. to get a better sense of the terms of this balancing effort, let me examine the implications, first, of relying completely on liquidity requirements to manage liquidity problems, and then of relying entirely on lolr liquidity from a central bank. the shortcomings associated with either of these one - dimensional approaches demonstrate why liquidity regulation and lolr should be viewed as complements and not substitutes. 3 note that financial entities that do not use debt financing can nevertheless experience liquidity pressures that are structurally similar to bank runs. for example, in the context of various pooled investment vehicles, investors may have an incentive to redeem their shares early because the costs of the redemptions are effectively borne by remaining investors. the resulting “ first - mover advantage ” contributed to runs on money market mutual funds in the fall of 2008 and could, at least in theory, lead to runs on other open - end fund vehicles