The situation came to a head in several euro area countries, initially in Greece, which had allowed deficits to creep up during the growth period. In the next round, Ireland and Portugal also came under pressure. They have had to rely on loans from the EU and the IMF with attendant economic programmes to stabilise and then reduce government debt. Government  BIS central bankers’ speeches  3  bond yields in these countries have continued to rise. Particularly with regard to Greece, there is renewed focus on the capacity to manage large fiscal deficits and rising government debt. Norway differs substantially from countries with high public debt. With ample state coffers, the Norwegian economy was to a considerable extent insulated from the effects of the financial crisis in 2008 and 2009. Norway has had room for manoeuvre because solid government finances secure credibility and because inflation expectations are firmly anchored. The oil fund mechanism curbs the effects of oil price fluctuations on the economy. The Norwegian economy has enjoyed the benefits of a disciplined fiscal policy. The fiscal rule has functioned effectively. Chart: Household debt There is one area in which Norway differs from other countries in a manner we perhaps do not like: Norwegian households are among the most heavily indebted in Europe. Household debt growth in Norway has edged down, but the level of debt shows no sign of falling. There is reason to keep a close eye on developments in these areas.
At the same time, over these ten years, we have gained insight into the functioning of the Norwegian economy under an inflation targeting regime. Inflation targeting is flexible, i.e. when setting the key policy rate, weight is also given to stabilising developments in output and employment. For monetary policy to contribute to stabilising developments in output and employment, there must be confidence that the inflation target will be reached. Inflation will not be at target at all times, but if there is confidence in monetary policy, expected inflation will be close to the inflation target over time, which in itself contributes to stabilising inflation. Norges Bank’s communication of monetary policy aims to stabilise inflation expectations by giving the reasons for and explaining interest rate setting. By publishing its interest rate forecasts and monetary policy strategy, Norges Bank has made it easier for others to understand and evaluate monetary policy. It is my objective to continue and enhance the Bank’s analysis and communication. Since March of this year our monetary policy reports have included a summary of the Executive Board’s discussion of monetary policy prior to the reports. Chart: Surplus liquidity in the banking system To be effective, the key policy rate must have an impact on market rates. Norges Bank supplies liquidity to banks to bring short-term money market rates down closer to the key policy rate. Surplus liquidity in the banking system is kept as sight deposits at Norges Bank. The redistribution of interbank liquidity does not function adequately.