svein gjedrem : the conduct of monetary policy introductory statement by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the hearing before the standing committee on finance and economic affairs of the storting ( norwegian parliament ), oslo, 14 may 2009. please note that the text below may differ slightly from the actual presentation. the statement is based on norges bank ’ s annual report for 2008, monetary policy report 1 / 2009 and the executive board ’ s assessments in the period to the monetary policy meeting on 6 may. * * * i would like to thank the chairman of the committee for this opportunity to report on monetary policy in connection with the storting ’ s deliberations on the government ’ s credit report. my statement is based on norges bank ’ s annual report, but is also updated based on the executive board ’ s assessments in the period to the previous monetary policy meeting and new information received to date. i also refer to this year ’ s report from norges bank watch, a group of experts that evaluates norges bank ’ s conduct of monetary policy. monetary policy in norway is oriented towards maintaining low and stable inflation. the operational target is annual consumer price inflation of close to 2. 5 per cent over time. the inflation target is an anchor for inflation expectations in the foreign exchange market, for the social partners in connection with wage settlements and for those setting prices for goods and services. in recent years, average inflation has been fairly close to, but somewhat lower than, the target of 2. 5 per cent. consumer price inflation peaked in october 2008, and has since receded. in april this year, cpi inflation was 2. 9 per cent. inflation measured by the cpi varies somewhat from month to month, primarily reflecting wide fluctuations in energy prices, but also other temporary disturbances amplify the variations. cpixe inflation shows developments in the consumer price index adjusted for tax changes and excluding temporary changes in energy prices. this indicator provides a better picture of underlying inflation. by this measure, underlying inflation peaked at 3 per cent last autumn. underlying inflation has since slowed somewhat and was 2. 7 per cent in april. interest rates increase in favourable periods when inflation is expected to rise and when growth and inflation recede. the interest rate is a rough instrument that we can use to keep inflation in check over time and thereby contribute to smoothing fluctuations in output and employment. we have seen that when the

governing capital requirements amplify cyclical fluctuations. the rules must therefore require banks to build up strong capital buffers over and above the minimum requirement in normal times. then the banks would not have to increase capital when a turnaround occurs, but on the contrary be able to absorb losses. this will counteract the need for banks to ration credit in adverse periods. many norwegian banks do not have sufficient buffers today to safeguard their own, their shareholders ’ or the economy ’ s best interests. third, banks ’ funding methods make them vulnerable. earlier, the two main sources of bank funding in norway were retail and wholesale deposits. in recent years, banks have borrowed heavily in both domestic and foreign markets. during the crisis, this proved to involve high liquidity risk for banks. in the future, in regulations and in practice, deposits must again take precedence as the largest funding source for banks. we also anticipate that bonds collateralised by high quality mortgages will become important. the credit swap arrangements can be seen as building a bridge to such a market. fourth, government authorities may be reluctant to apply stricter requirements to domestic banks, fearing that their competitiveness may weaken. such a drift in regulation towards a – too low – minimum level is important to avoid. for norway, it is essential that rules are applied both strictly and equally in the nordic countries. allow me to conclude. the world economy is these days in the deepest recession in the post - war period, in spite of the strong use of various measures. most markets and countries, including norway, have been hit by the crisis. norges bank has set the interest rate at a low level to curb the decline in activity and counteract an excessive fall in inflation. in accordance with its mandate, norges bank has given weight to anchoring and strengthening expectations that inflation will be low and stable ahead. this enhances the effectiveness of monetary policy. thank you for the opportunity to present these opening remarks.