Henceforth, the real return on the Government Petroleum Fund shall be used over the central government budget. Central government petroleum revenues shall continue to be transferred to the Government Petroleum Fund and invested abroad. Monetary policy in Norway is oriented towards low and stable inflation. Since March 2001 the inflation target is set at 2½ per cent. When monetary policy is oriented towards stabilising inflation, it also contributes to stabilising aggregate demand and output. The inflation target is the nominal anchor for the Norwegian economy. Low inflation is the objective and the interest rate is the instrument. If it appears that inflation with unchanged interest rates will be higher than 2½ per cent, the interest rate will be increased. If it appears that inflation with unchanged interest rates will be lower than 2½ per cent, the interest rate will be lowered. Low and stable inflation will be a fixed feature of economic developments. This is something that the social partners, businesses, borrowers and investors in property and securities can take as a given. From 1986, changes in the exchange rate or the prospect of changes in the exchange rate had implications for interest rates. A stable krone exchange rate was the nominal anchor. In Norway, this has been reflected in wage determination because labour cost developments among trading partner countries have been an important reference. Exchange rates between major international currencies fluctuate widely. The US dollar has appreciated by more than 30 per cent since 1995.
Holdings of liquid assets have trebled. BIS central bankers’ speeches  3  However, two crucial elements of the capital and liquidity regime are still at the design and agreement stage. The first is an international standard on leverage. Though the risk-weighted capital framework provides a system that it is more sensitive to risk, it is reliant on those risk-weights being correctly calculated and, therefore, vulnerable to so-called model risk. The riskweighted approach will fail if the risk-weights are wrongly calculated, either individually or, collectively. And the evidence of the crisis is that this risk can become more pronounced in boom times when asset prices are rising and the pressure to expand balance sheets with cheap funding is greatest. The result is dangerous concentrations in what appear to be lowrisk assets. It is telling that if a minimum leverage standard been in place prior to the crisis, it would have bound more tightly than risk-weighted measures for a number of banks that met their risk weighted capital ratios but that subsequently failed. The debate about the relative merits of risk weighted capital controls versus un-risk-weighted controls like the leverage ratio has in my view become too hung up on the question of backstops and frontstops – on which constraint should bite first. This is an unhelpful way to look at the issue. Risk-weighted and non-risk- weighted measures protect against different risks. The leverage measure is there to manage model risk, which can be very significant.