The arrangement will be phased out in the course of autumn. Norges Bank eased its collateral requirements to facilitate banks’ borrowing access in the central bank. That will be reversed. Moreover, we have earlier announced that Norges Bank will reduce the share of banks’ access to loans from the central bank backed by bank bond collateral. The interest rate is now extraordinarily low. The Executive Board considered raising the key policy rate at the monetary policy meeting on 23 September, but decided to leave it unchanged. Norges Bank has previously noted that if developments continue as expected, it may be appropriate to increase the key policy rate earlier than projected in the June Monetary Policy Report. 3. The financial crisis and economic policy – lessons  In Norway, there is a division of roles in economic policy. Wage formation, the tax system and economic regulation should contribute to well functioning markets and promote the efficient use of labour and other real economic resources. The government budget – growth in public spending – influences the real exchange rate and the size of the internationally exposed business sector in the long term. The fiscal rule enhances the predictability of petroleum revenue spending in the Norwegian economy even when the budget is actively used from one year to the next to stabilise economic developments and even when the automatic stabilisers are allowed to operate. A smooth phasing in of petroleum revenues dampen krone fluctuations and reduce the risk of abrupt and major shifts between internationally exposed and sheltered industries.
Let me discuss these scenarios in turn. The Phillips curve provides a useful framework for assessing the impact of growing economic slack and inflation expectations on price developments. In its most basic form, this theory posits that the inflation rate depends positively on the expected rate of inflation and negatively on the degree of slack in the economy, as measured, for example, by the difference between the supply potential of the economy and aggregate output, in other words the output gap. With euro area GDP falling at an annual rate of 4.8% in the first quarter of 2009 and unemployment rising to 9.2% in April, there is little doubt that spare capacity is high. This should exert downward pressure on prices. But how strong is this downward pressure, and can it determine deflationary risks for the euro area? Precise estimates of the Phillips curve for the euro area are subject to controversy. They vary depending on the specification, the precise measures of the output gap and expectations used, and the time frame considered. However, the general indication from the existing studies is that, on average, relatively large and persistent changes in the output gap are needed to affect euro area inflation. 5 In comparative terms, these changes are much larger than, for example, in the US and the UK. A simple plot (slide 9) of the evolution of various measures of the output gap against that of inflation for the euro area confirms that  5  See, for example, Musso, Stracca and van Dijkx (2007).