But additional equity capital is now very expensive and perhaps also difficult to procure. The alternative for banks may be to hold back on lending. If they do this on a large scale, it will have considerable negative effects on output and employment. It is understandable that  BIS Review 17/2009  1  credit growth is now slowing, both because demand for credit is lower and because fewer investments are profitable. But in addition, it appears that banks are applying stricter criteria in credit assessments and rationing credit. Norges Bank’s Survey of Bank Lending shows the banks’ own perception of this practice. The chart shows that over the past year banks have reported a tightening of credit standards. It appears that credit flows to households have improved somewhat, but banks are still tightening credit standards for corporate loans. An important lesson to be learned from this economic crisis is that compelling banks to increase their equity capital when the downturn has already started has a considerably negative impact. It is important that banks have sufficient capital to make them resilient even if the downturn should persist over a longer period. For this reason, we have proposed government capital injections in banks. The government bond fund will buy bank and corporate bonds. In Norges Bank’s view, it is particularly important helps to improve demand for corporate bonds. The fund shall primarily buy high quality bonds. The chart shows that it is on the whole borrowers with weaker ratings that are now being excluded.
After reducing the key rate to 1.75 per cent, we indicated that the uncertainty associated with previous monetary policy easing and the unusually low interest rate implied that we should be cautious with regard to further interest rate reductions. At the same time, the prospect of continued low inflation for a period ahead implied that wide deviations from projected economic developments would be required before the interest rate should be increased. Economic developments in the latter half of 2004 were broadly in line with expectations. The interest rate was left unchanged in line with our statements. We gradually experienced that the monetary policy easing was effective. The uncertainty diminished. The krone exchange rate The first signs of the effects of the interest rate cuts appeared in the foreign exchange market. The interest rate differential against other countries narrowed. It became more attractive to borrow and less profitable to invest in the Norwegian krone. The movement in the krone exchange rate was reversed and the krone depreciated through 2003 and into 2004. The depreciation of the krone contributed to restraining the fall in prices for imported goods. The effect occurred gradually. Higher prices for oil and gas and other exports goods - an improvement in the terms of trade - have increased Norway’s disposable income. This may fuel expectations of higher demand for goods and services in financial markets and lead to a deterioration in competitiveness in the bid for economic resources.