svein gjedrem : on business cycles, monetary policy and property markets speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the næringseiendom conference, bergen, 12 may 2006. please note that 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 26 april, inflation report 1 / 06 and on previous speeches. the charts in pdf - format can be found on the norges bank ’ s website. * * * introduction monetary policy in norway is oriented towards low and stable inflation, with annual consumer price inflation of close to 2. 5 per cent over time. this is also the most important contribution monetary policy can make to sound economic developments in the long term. low and stable inflation provides the economy with a nominal anchor. this contributes to predictability for agents who look ahead when they make decisions about saving, investment, wages and prices. in its conduct of monetary policy, norges bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. flexible inflation targeting builds a bridge between the long - term objective of monetary policy, which is to keep inflation on target and provide an anchor for inflation expectations, and the more short - term objective of stability in the real economy. growth in the norwegian economy has been strong since summer 2003. the reduction in norges bank ’ s key rate through 2003 and into 2004 resulted in low interest rates. low interest rates have contributed to a relatively sharp rise in household demand throughout this upturn. at the same time, solid growth in other countries has generated increased demand for many norwegian export goods, resulting in high prices. petroleum sector fixed investment has increased strongly, resulting in growing demand for goods and services supplied by mainland enterprises. mainland fixed investment has also picked up. commercial property markets after several years of fairly low activity, the number of commercial building starts is now increasing nationwide, including in hordaland, where growth in this industry is solid. through last year and so far this year, building activity has been particularly high in the retail trade sector. commercial building starts have more than tripled since the trough in 2003. these developments are reflected in the lending figures. through 2004 and 2005, banks ’ and mortgage companies ’ lending to enterprises in property management and services, and the retail trade

bank operates a flexible inflation targeting regime, so that weight is given to variability in inflation as well as to variability in output and employment. monetary policy affects the economy with a lag. the choice of a two - year horizon is thus based on striking a balance between variability in inflation and variability in output and employment, and a perception of how interest rates influence these variables. if extraordinary conditions prompt norges bank to apply a different time horizon than two years, the bank will provide an assessment of this. the same applies if special emphasis is placed on developments in financial markets. external cyclical developments and events have had considerable implications for developments in the norwegian economy. the international upturn came to a halt in 2000. the bubbles in the equity markets burst. many years of high investment led to excess capacity in some industries, and unemployment increased. the terrorist attacks on 11 september 2001 put a new damper on economic activity. from the summer of 2002 to the spring of 2003, a highly extraordinary accumulation of negative events in the global community - accounting scandals, fear of terror, war and disease - put a brake on growth. us interest rates, which were sharply reduced at the beginning of the downturn, have subsequently been reduced further. interest rates have also remained low in the euro area. key rates are now historically very low for several of our most important trading partners. long - term interest rates are also very low. the economic situation in norway remained firmer for a long period, and wage growth was surprisingly high in 2002. there was less scope for low interest rates than among our trading partners. as a result, the interest rate differential against other countries widened. this had an impact on krone exchange rate developments. in addition, special circumstances in the global economy led to a stronger krone than might have been expected from the higher interest rate differential alone. themes in foreign exchange markets shift. in periods, investor focus on stock returns feeds through to exchange rate movements. during periods of political and economic unrest, investors may choose individual currencies as a safe haven. in the autumn of 2002, the norwegian krone was probably also perceived as a safe haven. in the past 12 - 18 months, developments in the interest rate differential between norway and other countries appear to have had a particularly marked impact on our currency. norwegian interest rates have been pushed down towards the level prevailing abroad. in 2003, the interest rate differential narrowed as a result of monetary policy easing. the interest rate has been reduced by 5¼