Chart: Growth and returns  3/7  BIS central bankers' speeches  In the long term, growth in dividends and firms’ cash flows will reflect underlying economic growth. In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy. Global economic growth in the coming years is expected to be below its historical level. This “pessimism” is partly related to the driving forces behind the low level of the real interest rate. If we use more conservative estimates of future dividend growth as inputs in our models, our estimate of the ERP falls to below 4 percentage points. There is considerable uncertainty around this estimate, and Norges Bank’s projections are based on a more cautious estimate of 3 percentage points. Chart: Equity allocation and expected return The Ministry of Finance has requested the Bank to provide estimates of the expected return on the fund ahead. Expected bond returns are considerably lower than in 2006, while the expected excess return on equities relative to bonds is somewhat higher as expected term premiums are lower. With an equity allocation of 60 percent, our best estimate of average real return is about 2 percent per year over the next ten years. If the equity allocation is increased to 75 percent, the expected real return rises to about 2½ percent.
SPEECH  Higher policy rate will curb inflation Introductory statement by Governor Ida Wolden Bache at press conference following announcement of the policy rate and publication of Monetary Policy Report 3/22 Chart 1 Policy rate raised Norges Bank’s Monetary Policy and Financial Stability Committee decided to raise the policy rate from 1.75% to 2.25% at its meeting on 21 September. The policy rate will most likely be raised further in November. Norges Bank’s task is to keep inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability over time. We are raising the policy rate with the aim of bringing down inflation. Price stability is important for the economy to function well. It reduces uncertainty and facilitates planning. Those with low incomes and small margins are normally the hardest hit when inflation suddenly surges. The main contribution monetary policy can make to promoting high employment over time is to ensure low and stable inflation. As long as there is confidence that inflation will remain low and stable, the costs of minor deviations from the target of 2 percent are fairly insubstantial. But if households and firms expect inflation to be elevated and high inflation is incorporated into price and wage setting, inflation may take root, and bringing it down again could prove difficult. Chart 2: Inflation is high Consumer price inflation is now rising rapidly both globally and in Norway.