•  A second reason is that the changes in relative prices and wages that are necessary for the economy to develop can occur more easily if there is a low, positive inflation rate than if there is no inflation. In other words, some inflation can function as a lubricant in the economy. •  A third reason, and the one that has perhaps received most attention in recent years, is that if an inflation target is set too low, it will leave insufficient scope to stimulate the economy by cutting interest rates in a deep recession. Important that the inflation target remains in place But the most important thing is to choose a certain level for the inflation target and then build up confidence in this level. Such confidence can hardly be created if the inflation target is constantly being adapted to actual inflation. Many economic agents now assume that inflation will be around 2 per cent in the coming period. It is important that we can rely on this being the case. This does not mean that the Riksbank can ensure that inflation will always be 2 per cent. It is not possible to formulate monetary policy with such precision. Inflation will deviate from the 2 per cent level during certain periods. One reason is that unforeseen events will always occur, another is that it takes time before changes in monetary policy have a full impact.
In this respect, the strong krone is a sign that the Norwegian economy is faring well. Looking ahead, the outlook and balance of risks suggest that the key policy rate may be raised further in the period to summer. The prospect of higher price and cost inflation will in the short term outweigh weaker growth in the world economy. At the meeting on 13 March, Norges Bank’s Executive Board held the interest rate unchanged at 5.25 per cent and presented the interest rate path shown in this chart. The Board’s strategy is that the key policy rate should be in the interval 5-6 per cent in the period to end-June, unless the Norwegian economy is exposed to major shocks. The projections are uncertain. New information may reveal aspects of economic developments that indicate that the Norwegian economy is moving on a different path than projected. On the one hand, unexpectedly high cost inflation, higher import prices or a weaker krone may result in higher-than-projected inflation. On the other hand, if the global downturn has a stronger-than-expected impact on the Norwegian economy or if the krone appreciates markedly, inflation may be lower than projected. The uncertainty surrounding the interest rate ahead is illustrated by the shaded areas in the chart. The Government Pension Fund – Global Now, let me turn from the financial turmoil and economic developments in Norway to the Government Pension Fund – Global and the issue of sovereign wealth funds.