This assessment must also take account of the substantial uncertainty surrounding the calculation of the output gap, and of Norges Bank’s mandate which specifies that inflation shall be 2.5 per cent over time. The inflation gap and the output gap shall normally not be positive or negative at the same time further ahead. If, for example, both gaps are positive, a higher interest rate path would be preferable as this would bring inflation closer to the target and contribute to stabilising output. Depending on the initial situation for inflation and production, it may be difficult to meet these criteria simultaneously. How easy it is to meet these criteria will depend on the disturbances to which the economy has been exposed. There are also other important considerations when assessing the interest rate path. We must assess whether the interest rate path, at least in the next few months, results in acceptable developments also under alternative, but realistic assumptions concerning economic developments and the functioning of the economy. In other words, is the strategy robust? We must also evaluate the consequences for financial stability. Last, but not least, a successful monetary policy requires a reasonably good understanding of the state of the economy and its functioning. I will now discuss this in more detail. Analyses and models at Norges Bank The Executive Board’s assessments of various interest rate paths are based on projections of economic developments, supplemented by other information and discretion.
The prolonged period of low interest rates presents particular challenges for the banking sector. •  First, lower interest rates, a flattening of the yield curve, and lower corporate investment mean net interest income and profits are being squeezed. BIS central bankers’ speeches  1  •  Second, low interest rates and investment returns are driving a search for yield among households, asset managers and institutional investors, which could lead to excessive risk-taking and growing financial vulnerabilities. 6. Periodic bouts of heightened volatility in financial markets over the past few years, triggered by events such as the taper tantrum, normalisation of interest rates in the US, transition to a more market-based exchange rate system for the Chinese currency, and just days ago, the UK’s decision to leave the EU, underscore the fragility of global financial markets. At the same time, tightening financial conditions in the emerging market economies (EMEs) as a result of a stronger US dollar have exposed financial vulnerabilities due to excessive corporate and household borrowings in some EMEs. 7. This means that banks have to continue to update their risk management capabilities to cope with a more uncertain environment. MAS as the financial regulator has also been strengthening our risk surveillance and updating aspects of our regulatory framework. This evening I would like to touch on the following: •  stress test exercises to ensure resilience to emerging risks;  •  efforts to enhance cyber security; and  •  guidelines to strengthen risk management of outsourcing arrangements.