svein gjedrem : the economic situation, global uncertainty and monetary policy speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at a conference of the norwegian public service pension fund 2008, sandefjord, 16 april 2008. the text below may differ slightly from the actual presentation. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 13 march and in monetary policy report 1 / 08 and nbim annual report 2007. * * * there has been turbulence in global financial markets since last summer. what began as isolated losses in a small segment of the us housing market has gradually had substantial spillover effects in the global financial system. uncertainty and the fear of further losses are still reflected in the markets. it has also become increasingly evident that the turbulence will result in weaker global growth. only a week ago, the imf presented forecasts for global growth that were clearly weaker than those presented just a few months earlier. so far, the direct consequences of the turbulence have been limited in norway. however, continued turmoil and weaker global growth will affect the norwegian economy. i will return to this later. let me begin with some brief remarks about the current situation in the norwegian economy. the economic situation since the mid - 1990s, inflation in norway has been low and stable and it has been fairly close to, but somewhat lower than, the target of 2. 5 per cent, unlike the situation in norway in the 1970s and 1980s when inflation was high and showed wide fluctuations. the norwegian economy has on the whole also exhibited solid growth since the beginning of the 1990s, despite a mild downturn in 2002 and into 2003. over the past four years, the mainland economy has been in a strong upturn, with average annual growth well above 4 per cent. preliminary accounting figures suggest that growth was particularly strong in 2007. information from norges bank ’ s regional network also indicates that growth was strong in 2007, but that it slowed somewhat towards the end of last year. employment has risen sharply over the past two years. in both 2006 and 2007, the number employed increased by over 3 per cent. the number employed increased by 93 000 between 2006 and 2007, the highest increase for decades. employment growth has partly been offset by a decline in unemployment and an increase in the labour supply, as a result of increased labour participation among the existing population and labour inflows.

, we seek to generate value added in excess of the return that follows from the strategic allocation. the fund has achieved an average annual real return of 4. 25 per cent since 1997. the contribution to the return from active management has averaged 0. 39 per cent annually in the same period. active management has thus made a contribution of about 9 per cent of the fund ’ s total return. this result has been achieved without changes in the fund ’ s return variability or risk exposure. norges bank ’ s investment management has thus improved the risk to return trade - off. in the long run, even a small percentage increase in the average annual rate of return will have a substantial impact on the fund ’ s size. a stated goal of operational management is that a large number of investment decisions are to be taken independently of each other both at a given point in time and over time. norges bank will increasingly use the fund ’ s properties in developing investment strategies ahead, with particular emphasis on taking advantage of the fund ’ s size and long - term investment horizon. norges bank ’ s mandate sets the tracking error limit at 1. 5 percentage points. given this limit, the actual portfolio return is likely to deviate by less than 1. 5 percentage points from the benchmark portfolio in two of three years, but it also implies a risk that active management may reduce the return by more than 1. 5 percentage points every sixth year. in light of the size of the fund, this will be a substantial amount in krone terms. losses from active management must be expected in periods. losses are not necessarily an indication that active management is not conducted professionally or not using the right strategies. the performance of the fund ’ s investment management must be evaluated over a long time horizon. even if the contribution from active management was negative for the first time in the fund ’ s history last year, it does not change our confidence in and conviction that our organisation will contribute to achieving excess returns in the longer run. thank you for your attention.