reached its highest levels since the interwar years and the banking industry was mired in problems. the challenges of operating a fixed exchange rate regime in an oil economy became increasingly evident. in 1992, the policy of setting a specific target for the krone exchange rate was abandoned. monetary policy would still aim to maintain exchange rate stability, but the absence of a clear and verifiable objective was a weakness. internationally, a new approach to monetary policy was gaining ground. through the 1990s, a growing number of central banks were tasked with pursuing the goal of low and stable inflation. the introduction of the inflation target in 2001 was an important milestone for norges bank. the inflation target gave monetary policy an effective nominal anchor in a world of free capital movements. inflation had been under control since the early 1990s and confidence in the value of money strengthened further in the years thereafter. economic restructuring in norway during the first 15 years of inflation targeting, the norwegian economy was in a unique position. but the upswing could not last forever. the sharp fall in oil prices since summer 2014 will put the economy to the test in the period ahead. the norwegian economy has enjoyed an exceptionally long summer. winter is coming. norges bank : historical monetary statistics for norway. bis central bankers ’ speeches the norwegian economy is well equipped to tackle the challenges. the defence mechanisms of economic policy are better suited today than when oil prices fell in the mid - 1980s. at that time, current oil revenues were largely spent over the government budget. when oil prices plummeted, the budget was severely tightened. today we have accumulated savings of more than five times the government budget. in the 1980s, the banks had little equity capital. many of them failed when faced with loan losses, which in turn amplified the economic downturn. in recent years, banking regulation has been enhanced. banks have built up their capital levels, which puts them in a better position to fulfil their role as providers of credit during a downturn. bis central bankers ’ speeches towards the end of the 1980s, both interest rates and unemployment reached a high level at the same time. there is little likelihood that this will happen again. since the inflation target was introduced, it has been easier for monetary policy to have a countercyclical effect. when inflation expectations are firmly anchored, monetary policy should also be geared towards stabilising output and employment. inflation has been low and stable for a quarter century. this is now of benefit to us all. the

may have been somewhat higher earlier this year than we had assumed. when demand for goods and services is high, as it is now, firms can in turn pass on higher costs for labour, energy and intermediate goods to domestic consumer prices. some firms may take advantage of the good times by raising prices a little more than necessary in order to increase margins. chart : low and stable inflation is a public good the political authorities have mandated norges bank to keep inflation low and stable. we are also mandated to help keep employment as high as possible and to promote economic stability over time. low and stable inflation is important for the economy to function well and is a prerequisite for predictability. i don ’ t think any of us want to return to the great inflation of the 1970s. inflation also tends to become more variable at high levels, making it more difficult for both businesses and households to plan ahead and make financial decisions. by keeping inflation low and stable, we contribute to maintaining economic activity and employment at a high level. 2 / 3 bis central bankers'speeches high and variable inflation rates also have distributional implications. as an unexpected rise in prices will not automatically be followed by an increase in wages and benefits, the result will be a reduction in purchasing power, particularly for those with low incomes and small margins. norges bank cannot influence international commodity prices or water reservoir levels. inflation caused by these factors is beyond our control. but we can take steps to prevent inflation from becoming entrenched. higher interest rates have the effect of reducing demand for both labour and goods and services, thereby pushing down wage and price inflation. in addition, higher interest rates can contribute to strengthening the krone, which can in turn curb the rise in prices for imported goods. chart : household debt has increased as the policy rate is raised, residential mortgage rates will rise. norwegian households are highly leveraged. over the past 30 years, household debt as a percentage of disposable income has doubled. with higher debt, increased interest rates will have a stronger impact on household budgets and, combined with the high level of inflation, will curb growth in household consumption ahead. in just under a year, we have raised the policy rate five times. this means higher interest expenses for two out of three households. both in terms of hard cash and as a percentage of disposable income, interest expenses will increase most for households with the highest incomes, which is also the group with the highest debt to income ratios. as