extent to which our communication actually influences interest rate expectations. forward interest rates derived from yields at various maturities will in the absence of term premia and other risk premia normally reflect the market ’ s short - term interest rate expectations. 1 when inflation report 3 / 06 was published in the beginning of november last year, the forward interest rate was on a par with our forecast for the next six months, but considerably lower thereafter. it is now almost three months since the previous inflation report was published. since that time forward rates have increased and approached norges bank ’ s interest rate path. forward rates somewhat further out are still lower than our forecast. the reason may be that market participants have a different perception of the interest rate path that is necessary to stabilise inflation at target and to achieve stable developments in output and employment. alternatively, the market may have the same short - term interest rate expectations as norges bank, but because of extraordinary conditions long - term bond prices are being pushed up and, consequently, long - term bond yields are being pushed down. forward interest rates - often referred to as implied interest rates - are calculated so that a short - term bond, when rolled over and reinvested at the implied interest rates, generates the same yield as a long - term bond. for example, if we observe today ’ s one - and two - year interest rates ( ‘ short - term ’ and ‘ long - term ’ interest rate respectively ), the implied forward interest rate one year ahead will be expressed by the equation, where is the two - year interest rate, is the one - year interest rate and is the implied one - year rate one year ahead. the expectations hypothesis holds that the implied interest rate is equal to the market ’ s interest rate expectations and the expected return from rolling over short - term bonds is equal to the return on a long - term bond. however, if term premia exist, the expected return from rolling over shortterm bonds is different from the return on a long - term bond. if the term premium is positive, forward interest rates will overestimate expected future short - term interest rates, while they will be underestimated if the term premia are negative. long - term bond yields have been at historically low levels in recent years. from lying in a broad range around 10 per cent at the end of the 1980s, they have fallen to around 4 per cent in the past few years. developments in nominal interest rates must be seen in

- long consequences for economic developments. all that said, however, the challenges facing banks today require a broader set of instruments than those used by the nordic authorities 20 years ago, for two main reasons : first, the situation for banks is more complex. the authorities have to distinguish more clearly between insolvent banks and banks that are solvent but in need of more capital in order to increase lending. the lessons from the nordic banking crisis can be drawn on for the insolvent banks. for the solvent banks, the challenge is to maintain their lending capacity. this is particularly important given that other credit markets are not functioning normally, so that it is difficult, or impossible, for businesses to acquire funding directly from bond markets. but without more capital, the banks are not willing to accept new loans on their balance sheets. the main challenge facing the authorities today therefore is to ensure that solvent banks increase their financial strength and thereby their lending capacity. at the same time, it is important to have an exit strategy so that capital injections today do not translate into an increase in state ownership when the crisis is over. second, cross - border banking has been increasing. twenty years ago, all the main nordic banks were national banks. today, for example, four of the five largest banks in norway are foreign - owned ( three branches and one subsidiary ). a national authority cannot be expected to bolster the financial strength of branches of foreign banks : indeed, it could be complicated to do this even for foreign - owned subsidiaries. while we were able to choose national solutions to the banking crisis 20 years ago, any effective solution to today ’ s situation will require an internationally harmonised approach. as today ’ s financial crisis progressively gets resolved, it will be necessary to start the process of preventing future crises. this will require substantial reform of the regulatory framework. banks will have to strengthen their capital and their liquidity buffers. and financial regulation must have a less pro - cyclical effect. the objective must be to enable the banks to curb the impact of shocks on the economy, rather than to amplify them, as is the case now, where negative spirals are generated between the financial system and the real economy. because of the global character of today ’ s financial crisis, the authorities must work in concert to find solutions, both in terms of recapitalisation of the banks and regulation of the financial sector.