close down or relocate production. the inflation target is the vehicle for monetary policy ’ s contribution to stabilising output and employment. in spite of high wage growth, the strong krone has kept inflation at a low level. global stagnation has changed the domestic inflation outlook in recent months. the tight monetary stance is reflected in the strong krone. a gradual easing of monetary policy would thus seem appropriate. as long as inflation remains low and stable, any substantial deviations in the krone exchange rate over time will have an impact on business and industry. as a result, the krone exchange rate will tend to return towards its long - term mean. the interest rate differential between norway and other countries has resulted in a strong krone. the wide interest rate differential is due to the historically low level of interest rates abroad. if the world economy experiences prolonged stagnation and the krone remains firm, a markedly lower interest rate will lead to a weakening of the krone and mitigate the effects for norway. any fiscal slippage will contribute to maintaining a strong krone.

ratios were at the outset fairly high, with high quality tier 1 capital, and norway had a bank guarantee fund financed, albeit only just, by capital paid in by banks. norges bank also holds ample foreign exchange reserves and was able to supply foreign exchange to banks. norwegian banks felt the impact of the global financial crisis primarily as a result of reduced access to funding. over time, banks have increasingly relied on fairly short - term funding in global markets to finance their lending. this is the main reason why norwegian banks encountered problems when funding from foreign sources dried up in 2008. for norwegian banks, the financial crisis essentially proved to be a funding and liquidity crisis. new and increased equity capital and liquidity requirements for banks can promote stability in the financial system. the requirements should probably be more stringent in norway than the minimum requirement that is likely to be agreed internationally. it is also important to cooperate with the other nordic countries to avoid a situation where more lightly regulated banks aggressively market loans in norway. the global financial crisis has shown that credit cycles and property market bubbles that burst represent one of the greatest challenges to economic policy. the experience of many countries over several decades has shown that house prices and residential mortgage lending usually rise prior to the outbreak of a banking crisis. 1 in norway, interest rate expenses can be deducted from taxable income, while capital gains on dwellings and the benefit of home ownership are not taxed. housing is taxed as an asset, but not at its market value. high tax subsidisation of home ownership and a large proportion of floating - rate loans contribute to considerable fluctuations in house prices in norway. furthermore, the rise in house prices over the past two decades has been high compared with countries where house price bubbles have now burst. high house prices and substantial household debt add to the economy ’ s vulnerability. in march, finanstilsynet ( financial supervisory authority of norway ) issued new guidelines for prudent residential mortgage lending. the guidelines may have a somewhat dampening impact on the rise in debt and house prices. the global financial crisis has revealed weaknesses in the financial system. regulation of financial institutions should seek to limit risk not only in individual banks, but also in the financial system as a whole. risk is amplified by the interaction between financial institutions. today, we can see that the crisis was amplified by the very surprise over the extent to which financial markets are interwoven. losses on subprime mortgages in the us shattered confidence in