øystein olsen : the conduct of monetary policy introductory statement by mr øystein olsen, 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, 19 may 2020. * * * accompanying slides of the speech. please note that the text below may differ from the actual presentation. when i appeared at the hearing before this committee this time last year, the norwegian economy was growing at a solid pace and the policy rate was on the rise. the policy rate was raised three times in 2019, from 0. 75 percent to 1. 50 percent. there was no longer any need for low interest rates to support economic activity. after several years of solid economic growth and falling unemployment, capacity utilisation was assessed to be somewhat above a normal level in 2019. inflation was close to the 2 percent target. gdp growth slowed through autumn, and towards the end of 2019 the norwegian economy was assessed to be close to the peak of the business cycle. there were prospects that the policy rate would remain close to 1. 50 percent ahead, inflation would continue to be close to the inflation target and unemployment would remain low. we envisaged that growth would slow in the years ahead, partly as a result of weaker prospects for petroleum investment. none of us at that time could have foreseen that a virus would change the picture completely and lead the norwegian and the global economy into a deep decline. chart : a historically deep decline the economic outlook has changed dramatically in a short period of time. activity in the norwegian economy has fallen abruptly owing to the coronavirus pandemic. the virus outbreak and the extensive measures taken to contain it have led to production halts and lower activity across a range of businesses. unemployment has risen to very high levels. mainland gdp is projected to fall by around 5 percent in 2020. we have not seen a contraction like this since the war years. chart : an abrupt and deep decline in the global economy the countries around us have also been severely affected. measures taken to contain the spread of the virus, combined with changes in behaviour and uncertainty about developments ahead, have resulted in substantial declines in output across economies. in early march, we expected moderate economic growth among trading partners. now a deep decline appears likely this year followed by a gradual rebound. the subsequent path of developments is, however, highly uncertain. the authorities in many countries have implemented powerful fiscal policy measures

bonds. this contributes to keeping us long - term interest rates at a low level, which in turn have a considerable impact on developments in long - term interest rates in other parts of the world. in addition to these conditions, new accounting and solvency rules are being introduced in many countries. the new rules provide pension funds in particular with incentives to lengthen asset maturities, improving the balance between asset and debt maturities. increased demand for long - term bonds push up bond prices and push down yields. normally, an investor will, on an expectations basis, be compensated in the form of a positive term premium for holding long - term bonds instead of rolling over short - term bonds. various conditions though the literature is vast, see for example ahrend, r., p. catte and r. price ( 2006 ) ‘ factors behind low long - term interest rates ’, working papers 490, oecd, www. oecd. org, imf ( 2005 ) ‘ global imbalances : a saving and investment perspective ’, world economic outlook september 2005, www. imf. org, imf ( 2006 ) ‘ awash with cash : why are corporate savings so high? ’, world economic outlook april 2006, www. imf. org, and rajan, r. g. ( 2006 ) ‘ is there a global shortage of fixed assets? ’, remarks 1. december, www. imf. org relating to saving and investment patterns in the world economy and new accounting and solvency rules may have led to a marked fall in term premia in recent years. in some markets, they can even be negative. the level of long - term interest rates is frequently used as an indicator of the normal interest rate level. if low long - term interest rates are caused by extraordinary conditions and not expectations of low growth and low inflation, long - term market interest rates may underestimate the normal interest rate level. when preparing an interest rate forecast, we must have a view of what the normal interest rate level is. in order to produce a forecast that reflects a reasonable trade - off in monetary policy, we have also drawn up a set of guidelines, which are presented in the inflation report. the criteria cannot provide an absolutely precise guide as to how the interest rate should be set, but points to factors we should have considered and assessed. the central trade - off is between inflation prospects and the prospects for capacity utilisation in the economy, expressed in