On 29 October, the Federal Reserve reduced its key rate by a further 0.5 percentage point. On 6 November, the European Central Bank and the Bank of England reduced their key rates by 0.5 percentage point and 1.5 percentage points, respectively. Market participants expect key rates to be reduced further among most of our trading partners. Norges Bank reduced its key policy rate by a total of 1 percentage point to 4.75 per cent. Norwegian money market rates increased markedly as a result of risk premiums abroad spilling over into the Norwegian market. The eurodollar market has been a widely used source of financing for Norwegian banks. Dollars in this market are used to procure NOK liquidity and to redistribute liquidity among banks. Banks borrow in US dollars and then swap them for NOK. The conditions in financial markets have improved somewhat recently, but access to credit is still limited and risk premiums are high. Premiums are expected to edge down in the coming quarters, but market participants believe that it will take time to restore confidence in banks. Monetary policy influences the economy through several channels, often referred to as the monetary policy transmission mechanism. The relationship between Norges Bank’s key policy rate and the effects on activity and inflation has been impaired by money market conditions. The transmission mechanism is not functioning as previously. Money markets have become highly segmented. There is limited turnover and at times it is difficult for foreign operators to satisfy their need for NOK liquidity.
But the different steps that have been gradually taken on a political level should, as I see it, be able to alleviate a confidence crisis that is largely political. This would point to an orderly resolution of the euro crisis. It then remains to be seen whether the crisis flaring up around Greece now can have more farreaching consequences. In a worried, nervous climate even a problem that only affects one small country can have contagion effects. Could things go better than we are forecasting? I have earlier listed various downside risks. Are there any conditions under which growth might be better than we are forecasting? My assessment is that this is the case, although things look uncertain right now and we cannot expect any rapid improvements. I think it is worth pointing out that we only expect a cautious recovery in growth in the euro area from the end of 2012 and onwards. What we are now seeing is a confidence crisis of gigantic proportions, but it also means that if political measures can build up confidence step by step, the economy in the euro area can recover with greater force than we are predicting. As I mentioned earlier, there are countries in the euro area with good fundamental conditions for a stronger recovery. In the United States there are good conditions for a better outcome. In this situation growth can be somewhat stronger than the fairly modest growth we are predicting. Particularly if housing construction picks up again, after several years of adjustment.