Jan F Qvigstad: Outlook for the Norwegian economy Address by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at Sparebank 1 Fredrikstad, 4 November 2009. The text below may differ slightly from the actual presentation. The speech is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 28 October and Monetary Policy Report 3/09. *  BIS Review 139/2009  *  *  1  The operational target of monetary policy in Norway is low and stable inflation, with annual consumer price inflation of close to 2.5 per cent over time. In recent years, average inflation has been close to, but somewhat below 2.5 per cent. Consumer price inflation has generally been somewhat below target since 2003 and monetary policy was then oriented towards pushing up inflation. In 2007 and 2008 inflation picked up to slightly above target. Inflation expectations were firmly anchored and the key policy rate was gradually raised to a more normal level. Inflation close to target and firmly anchored inflation expectations were essential for monetary policy to be effective when substantial cuts were made in the key policy rate in autumn 2008 and the beginning of 2009. It has been a year since financial turbulence developed into a full-blown crisis and resulted in the most severe downturn in the global economy since the Second World War. The financial crisis eroded confidence in banks, counterparties and contractual partners.
As always, what I have to say today reflects my own view and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. Although a reserve currency can formally be defined as any currency that is part of a foreign country’s foreign exchange reserve holdings, I do not think this is what we have in mind when we talk about a reserve currency. While the status of being a reserve currency can be conferred, the stature of being a reserve currency must be earned. As I see it, a successful reserve currency needs to satisfy a number of conditions. First, the currency needs to be fully convertible – with no risk of restrictions that could limit the ability to convert such holdings into cash denominated in the investors’ domestic currency. Second, the reserve currency country needs to have deep, liquid and transparent capital markets so that the sovereign debt instruments and other highquality debt obligations can be bought and sold at narrow bid-ask spreads and easily converted to and from cash. Third, the assets in the country must be governed by a wellunderstood, consistent and enforceable legal regime. This is to ensure that investors’ rights will be well protected, regardless of short-term political developments or changes in the governing regime. Fourth, the financial system in the country must be strong and stable to ensure that liquidity will be available even during times of stress.