The focus of my discussion will be on the latter part of this period. This is because developments in 2000-2001 were illustrated very clearly in last year's assessment. Price rise and monetary policy 2001 The fact that inflation was over the target level during the second half of 2001 and first half of 2002 was largely due to supply shocks similar to those we are experiencing now. Food prices rose considerably as a result of mad cow disease, foot-and-mouth disease and higher prices for fruit and vegetables resulting from poor harvests. There was also a rise in electricity prices. The Riksbank's  BIS Review 15/2003  3  assessment was then, as it is now, that these price rises were essentially temporary and inflation would soon fall again. This proved to be the case and in this sense the upturn in inflation 2001 did not comprise a serious monetary policy problem. However, the inflation rate rose even after adjustments were made for food and energy prices; there appears to have been a rising trend in various measures of underlying inflation from early 1999 to early 2002. It has since been shown that the Riksbank and other forecasters overestimated GDP growth and underestimated inflation when we made our forecasts for 2002 during 2000 and 2001. Perhaps we were a little too optimistic with regard to the economy's capacity to grow without inflation accelerating.
A century ago, depositors could lose confidence in the banks and rush to withdraw their savings. However, deposits stabilised when guarantee schemes were established in the 1930s. Loans to households make up a third of banks’ assets. Residential mortgage loans are longterm loans. At the same time, funding for Norwegian banks has changed. Market funding has assumed a more important role. In recent years, both short-term market funding and funding  BIS Review 8/2010  1  in foreign currency have grown in Norwegian banks. Banks have increasingly transformed short-term deposits from international money markets into long-term domestic lending. This is the main reason for the strain on liquidity experienced by Norwegian banks when foreign funding came to a halt in 2008. For Norwegian banks, the financial crisis has primarily been a liquidity crisis and not a solvency crisis. The authorities all over the world are currently reviewing the regulation of banks’ liquidity. The Basel Committee on Banking Supervision presented recommendations on quantitative liquidity requirements in December 2009. The UK, Switzerland and New Zealand have introduced, or are in the process of introducing, stricter rules. Norwegian banks must also expect the regulation of liquidity to be more stringent in the future. It will be more difficult to base housing finance on short-term funding. Issuing covered bonds may be an alternative.