jan f qvigstad : outlook for the norwegian economy address by mr jan f qvigstad, deputy governor of norges bank ( central bank of norway ), at sparebank 1 fredrikstad, 4 november 2009. the text below may differ slightly from the actual presentation. the speech is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 28 october and monetary policy report 3 / 09. * * * the operational target of monetary policy in norway is low and stable inflation, with annual consumer price inflation of close to 2. 5 per cent over time. in recent years, average inflation has been close to, but somewhat below 2. 5 per cent. consumer price inflation has generally been somewhat below target since 2003 and monetary policy was then oriented towards pushing up inflation. in 2007 and 2008 inflation picked up to slightly above target. inflation expectations were firmly anchored and the key policy rate was gradually raised to a more normal level. inflation close to target and firmly anchored inflation expectations were essential for monetary policy to be effective when substantial cuts were made in the key policy rate in autumn 2008 and the beginning of 2009. it has been a year since financial turbulence developed into a full - blown crisis and resulted in the most severe downturn in the global economy since the second world war. the financial crisis eroded confidence in banks, counterparties and contractual partners. the measures implemented by central banks and governments have had a stabilising effect on financial markets. credit and money market premiums have decreased and activity has picked up. daily fluctuations have become less pronounced. with the improvement in financial markets over the past six months and the increase in the credit supply, global trade is now picking up slightly, albeit only gradually and from a low level. manufacturing output has recently risen in the us, japan and many emerging economies, while it continues to fall – albeit at a slower pace – in many euro area countries. manufacturing output in japan and the us is still at a very low level. despite the pickup in growth, capacity utilisation in advanced economies will remain very low for the next two - three years. uncertainty in equity markets has eased and risk premiums are lower, reflected in a rise in leading us stock indices of more than 50 per cent since equity markets bottomed out at the beginning of march 2009. oslo børs has risen by about 70 per cent since the beginning of march. the price of oil has risen somewhat since the june report

also stepped up its supply of liquidity to banks in the form of short - and long - term loans. the arrangement whereby banks could exchange covered bonds ( omf ) for government securities made a contribution to securing long - term funding for banks. strong growth in government spending fuelled demand for goods and services. the authorities supply risk capital to norwegian banks through the norwegian state finance fund to strengthen banks ’ solidity. the government has also provided increased loans and guarantees to norwegian export industries, and has raised lending limits for state banks. in addition, folketrygdfondet ( the government pension fund – norway ) has been permitted to increase its purchases of bonds. the extraordinary monetary and liquidity measures implemented were tailored to a situation in which financial markets no longer functioned. in norway, it has been appropriate to start winding down the unconventional measures earlier than in other countries : in recent months, norges bank has not supplied liquidity through the currency swap lines or liquidity in foreign currency. loans in nok at long maturities have not been provided since february. surplus liquidity in the banking system was increased to more than nok 100 billion, but is now close to a more normal level. this motivates banks to revert to money market funding. the swap arrangement involving covered bonds ( omf ) in exchange for government securities has made an essential contribution to securing banks ’ long - term funding. the first signs that the covered bond market was beginning to function appeared in spring. the minimum price in the swap arrangement has been raised by 0. 9 percentage point, from nibor - 0. 2 percentage point to nibor + 0. 7 percentage point. use of the arrangement is currently being phased out. norges bank eased its collateral requirements to enable banks to increase their borrowing in the central bank. this measure is now being reversed. norges bank has also announced that the share of a bank ’ s borrowing facility that can be based on collateral in the form of bank bonds will gradually be reduced. covered bonds will continue to be eligible as collateral. mainland gdp increased in q2 after two quarters of negative growth. growth was somewhat higher than expected, reflecting solid growth in public sector demand and private consumption. in september, norges bank ’ s regional network contacts reported that activity had edged up in q3. the main contribution came from industries providing goods and services to households and the public sector. despite a moderate rebound in both domestic and international activity, prospects for manufacturing and the building