##turn will be deeper and more prolonged than expected. if this proves to be the case, growth in the norwegian economy will not pick up as quickly and inflation will fall more sharply than we currently assume. the objective of avoiding a pronounced downturn indicates in isolation that the interest rate should be rapidly reduced to a low level. on the other hand, we have already made substantial reductions in the key policy rate. with a low interest rate, households may save less and the turnaround may occur more rapidly than we assume. this indicates in isolation that changes in the interest rate should be gradual or that further interest rate cuts should be put on hold. overall, the outlook and balance of risks suggest that the key policy rate should be gradually reduced further to a level of around 1 per cent in the second half of 2009. this is about one percentage point lower than in norges bank ’ s forecast from 17 december last year. with the low interest rate added to the government fiscal measures, our analysis indicates that growth in the economy will be positive from the second half of this year. growth will be driven by a rise in private consumption as a result of a low key policy rate, growth in real wages and higher government transfers. activity in the economy will be underpinned by strong growth in government spending. the projections are based on the assumption that norges bank ’ s interest rate changes will translate into lower lending rates for households and businesses. at the same time, tighter credit standards in banks are making monetary policy somewhat less effective than normal. inflation is projected to fall below 2 per cent in 2010, before gradually moving up towards the target towards the end of the projection period as the output gap gradually closes. there is a risk that the structural changes brought about by the crisis may result in persistently lower productivity growth. it appears that inflation will remain considerably lower in the years ahead than we expected in december. both the objective of stabilising inflation around the target and the objective of ensuring stable developments in the real economy suggest that the interest rate should be low. interest rate setting can also be assessed using simple monetary policy rules that prescribe an interest rate path based on actual inflation and output. the calculations are based on projections for inflation and output in the current monetary policy report. the different rules yield somewhat divergent results, but all of them indicate a decline in the interest rate. rules do not capture possible restrictions in the supply of credit that may affect the monetary policy transmission mechanism. norges bank has estimated a

“ the purpose of norges bank is to maintain monetary stability and promote the stability of the financial system and an efficient and secure payment system ”, while the second paragraph reads : “ the bank shall otherwise contribute to high and stable output and employment ”. a well - functioning monetary system is a fundamental prerequisite for the efficient functioning of an economy. norges bank plays a key role in this context. it naturally follows that the objectives set out in the first paragraph of the objects clause are primary objectives for the bank and fully in line with the principles on which the bank already bases its activities. 1 / 8 bis central bankers'speeches trust in the stability of the value of money is the very foundation of the monetary system. in addition, households and businesses must be confident that the payment system will allow them to conduct transactions securely at all times. an efficient and stable interbank payment and settlement system also provides a necessary basis for the stability of the financial system. with financial system stability, investors can channel available capital to investments offering the highest return. norges bank also has a key role in the management of crises in the financial system. in a crisis, the bank can supply liquidity both to influence market interest rates and to stabilise the financial system. flexible inflation targeting the purpose of “ maintaining monetary stability ” sets a long - term objective for monetary policy. the day - to - day conduct of monetary policy requires a more operational target. most countries set this target in the form of a regulation or a more time - limited mandate issued by the government. the operational target is set to meet the primary objective, but is also a means of holding the central bank accountable. chart : emergence of inflation targeting the objective of monetary stability is compatible with a range of operational targets. in the past, central banks were expected to ensure that money would keep its value in precious metal. later, this was replaced by a fixed exchange rate regime whereby the currency was pegged to other currencies. various forms of fixed exchange rate regimes are still in use in many countries, but since new zealand introduced inflation targeting as a framework for monetary policy in 1990, an increasing number of countries have chosen to link monetary stability to a numerical inflation target. today, more than 30 countries have adopted some form of inflation targeting. international experience with inflation targeting has been predominantly positive. both during and after the global financial crisis, economic growth performance has been better in inflationtargeting countries. one important reason may be that a floating