with good access to short and long - term funding. however, the interbank market is still not functioning satisfactorily. we have now moved into a phase where the main challenge may be banks ’ financial strength. this is partly due to the downturn in the global and norwegian economies, which over time will result in higher losses, but also because higher capital adequacy is now being required in the markets. the same view has been expressed by the norwegian supervisory authority. we see that many banks abroad are raising new capital, with or without assistance from the authorities. but additional equity capital is now very expensive and perhaps also difficult to procure. the alternative for banks may be to hold back on lending. if they do this on a large scale, it will have considerable negative effects on output and employment. it is understandable that credit growth is now slowing, both because demand for credit is lower and because fewer investments are profitable. but in addition, it appears that banks are applying stricter criteria in credit assessments and rationing credit. norges bank ’ s survey of bank lending shows the banks ’ own perception of this practice. the chart shows that over the past year banks have reported a tightening of credit standards. it appears that credit flows to households have improved somewhat, but banks are still tightening credit standards for corporate loans. an important lesson to be learned from this economic crisis is that compelling banks to increase their equity capital when the downturn has already started has a considerably negative impact. it is important that banks have sufficient capital to make them resilient even if the downturn should persist over a longer period. for this reason, we have proposed government capital injections in banks. the government bond fund will buy bank and corporate bonds. in norges bank ’ s view, it is particularly important helps to improve demand for corporate bonds. the fund shall primarily buy high quality bonds. the chart shows that it is on the whole borrowers with weaker ratings that are now being excluded. norges bank is nevertheless of the view that higher demand for the best bonds will have a positive effect. this will reduce the pressure on banks, and it may result in a shift in private demand towards bonds with a lower credit rating. thank you for your attention.

more rapidly than expected. this has had a considerable influence on the inflation outlook. the interest rate has been reduced by 4. 5 percentage points, and the krone has appreciated by about 10 per cent. the interest rate reductions this year will make a significant contribution to bringing inflation back to target. in the short term, the effects will primarily be channelled through a weaker krone. in the somewhat longer term, the fall in interest rates will also lead to higher inflation than would otherwise have been the case through stronger demand in norway. inflation back on target at the two - year horizon we now expect inflation to move up and stabilise around the inflation target at the two - year horizon. output and employment are picking up. in our projections, capacity utilisation is stable with an output gap, as calculated by norges bank, close to zero. 3 uncertainty associated with inflation projections projections are uncertain. experience of uncertainty surrounding inflation forecasts would indicate that when monetary policy is oriented towards reaching the target of 2½ per cent, inflation will remain within the interval of + / - 1 percentage point around the target in four out of five years. this is consistent with the experience of other countries with an inflation targeting regime. it should be noted, however, that this level of accuracy is based on a period of stable inflation in the oecd countries. the interest rate reductions and the fall in the krone exchange rate imply that inflation will gradually increase and will be considerably higher than the current level as early as next spring. after such a period of very low inflation as we have now witnessed, it is appropriate to be particularly vigilant in monetary policy in the event that inflation does not increase as projected. these estimates are uncertain and must therefore be interpreted with caution. the analysis of developments in the exchange rate from may 2000 to january 2003 is discussed in more detail in bjørn naug ( 2003 ) : “ faktorer bak utviklingen i kronekursen – en empirisk analyse ” ( factors underlying developments in the krone exchange rate – an empirical analysis ), in norges bank ’ s occasional papers, no. 31 ( norwegian only ). these projections are discussed in more detail in norges bank ’ s inflation report 3 / 2003. the analyses are based on the technical assumption that the interest rate will move in line with expectations in financial and foreign exchange markets, implying that the interest rate will remain at the current level well into