As the economic situation abroad normalises, and pressures on the Norwegian krone ease, cost inflation and high activity in Norway will result in higher consumer price inflation. The key policy rate will then gradually be raised and approach a normal level. But developments could take another course. A pronounced weakening of growth prospects or a krone that is too strong may over time lead to inflation that is too low. Such developments would be counteracted by monetary policy measures. We still have room for manoeuvre in interest rate setting – in both directions. More resilient banking sector The financial crisis provided us with some important insights. First, the crisis illustrated that low and stable inflation is not sufficient to secure financial stability. Second, the crisis revealed severe shortcomings in banking regulation. Banking and financial sector regulation is now being reformed in many countries. New liquidity buffer and capital adequacy requirements are due for implementation in line with the changes to the EEA rules. The regulatory reform will make the banking industry more resilient to periods of rising losses and financial market turbulence. Norwegian banks have become more solid in recent years, which is a positive development. Banks’ capital, in particular that of the largest banks, should be increased further in order to satisfy the new requirements due for implementation. Chart 9: Bank lending margins have increased Banks’ lending rates have remained fairly high over the past year, despite a fall in their borrowing costs.
At the same time, our increasing dependence on oil and gas increases the vulnerability of the Norwegian economy. We know that neither of these sources will spring eternal. The theme of my speech this evening is how to enhance the resilience of the Norwegian economy. Continued weak growth prospects, but less fear When the financial crisis washed over the Norwegian banking sector in autumn 2008, we were reminded of how dependent we are on the world around us. Nonetheless, the Norwegian economy weathered the crisis well. After about a year, the downturn in Norway was over. Chart 1: Emerging economies are driving oil demand One of the main reasons is that there is strong demand for Norwegian goods in countries where economic growth remains robust. The centre of gravity in the world economy is shifting. In the course of the next few decades, China will most likely be the largest economy in the world. Emerging economies – with China at the forefront – are the main driving force behind the increase in demand for crude oil and other commodities. As a result, prices for Norwegian export goods have remained high, even in the context of declining growth among our traditional trading partners. Chart 2: Strong improvement in terms of trade  1  From Johan Borgen’s novel “De mørke kilder” [The Dark Springs], first published in 1956, Gyldendal Norsk Forlag. BIS central bankers’ speeches  1  The emergence of newly industrialised economies has also led to lower import prices in Norway.