Norway Central Bank Statement

Author: | Published: 5 Sep 2017
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Norway introduced an inflation target as part of its monetary policy framework in 2001. The operational target of monetary policy in Norway is an annual consumer price inflation of close to 2.5% over time. Norges Bank operates a flexible inflation targeting regime where weight is also given to the variability of output and employment. The Regulation on Monetary Policy is now being considered by the Ministry of Finance, which is natural after 15 years' experience of inflation targeting. Overall, our experience shows that the monetary policy framework has served the Norwegian economy well.

Inflation has been predominantly low and stable since inflation targeting was introduced in 2001. Average annual consumer price inflation has been close to, but somewhat below, 2.5%. At the same time, employment has consistently been more stable since 2001 than earlier.

The inflation target has anchored inflation expectations. With a flexible inflation targeting regime, the scope for the use of judgement has also allowed monetary policy to respond to shocks and dampen associated effects on output and employment.

Norway has been exposed mainly to external shocks over the past 16 years with large shifts in its terms of trade and strong effects from fluctuations in the world economy. Global interest rates have been very low and labour immigration to Norway has been high. In response to these developments, monetary policy has had to make trade-offs between stabilising output and employment and stabilising inflation around the target.

Providing for flexibility in inflation targeting has proved essential for making the appropriate trade-offs in response to these shocks. The time horizon for achieving the target must be sufficiently long. The exchange rate has also played an important role as a shock absorber, particularly during the financial crisis and in periods of falling oil prices. At the same time, the interest rate level abroad places limitations on the room for manoeuvre in monetary policy in a small open economy like Norway.

The global interest rate level will likely remain low for several years ahead. This has raised the question of how far monetary policy should go in addressing financial stability. For Norges Bank, the consideration of restraining the build-up of financial imbalances has long been an element of a robust monetary policy. The aim is to mitigate the risk of particularly adverse economic outcomes further ahead.

The build-up of financial balances increases the risk of a deep downturn. Monetary policy can reduce vulnerabilities by leaning against the wind, i.e. by keeping the interest rate higher than necessary to meet the inflation target in the short run. But this policy could also involve costs in terms of somewhat weaker economic developments in the short run than would otherwise be the case.

The aim of leaning against the wind is to achieve a sustainable path for inflation, output and employment. This is in line with our central bank mandate. Flexible inflation targeting with a sufficiently long horizon should take account of financial stability where possible and necessary.

At the same time, it should be stressed that financial regulation and supervision are the first line of defence against shocks to the financial system. The main task of monetary policy is to provide the economy with a nominal anchor. When inflation is firmly anchored, monetary policy can also contribute to real economic stability.




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