Norway has had an inflation target as part of its
monetary policy framework since 2001. The operational target of
monetary policy has been annual consumer price inflation of
close to 2.5% over time. Our inflation targeting has been
flexible, also emphasising stability in output and
Norges Bank's experience is that the monetary policy
framework has worked well. Inflation has been low and stable
and the inflation target has anchored inflation expectations.
During the period of inflation targeting, the Norwegian economy
has been exposed to large and persistent shocks. A flexible
inflation targeting regime has helped dampen the impact on
output and employment.
On March 2 2018, the Norwegian government laid down a new
regulation on Monetary Policy. The operational target of the
monetary policy is now an annual consumer price of close to 2%
over time. The inflation target is thereby brought to the same
level as our trading partners. The new regulation explicitly
states that inflation targeting shall be forward-looking,
contribute to high and stable output and employment and
counteract the build-up of financial imbalances.
The new regulation clarifies the monetary policy mandate and
underpins the flexible approach to inflation targeting. It is
consistent with how Norwegian monetary policy has been
conducted. The new inflation target will not result in
significant changes in Norges Bank's conduct of monetary
policy. The horizon for achieving the inflation target will
still depend on the disturbances to which the economy is
exposed and the effects on the outlook for inflation and the
A flexible inflation targeting regime can prevent downturns
from becoming deep and protracted. This can reduce the risk of
unemployment becoming entrenched at a high level following
economic contractions. However, monetary policy cannot assume
primary responsibility for high output and employment. Monetary
policy can nonetheless contribute to stabilising output and
employment around the highest possible level that is consistent
with price stability over time. This level is determined by
structural conditions such as the tax and social security
system, wage formation and labour force composition.
Monetary policy may, to some extent, be able to contribute
to counteracting the build-up of financial imbalances and,
thereby, reduce the risk of sharp economic downturns further
ahead. However, the primary means of addressing shocks to the
financial system is still the regulation and supervision of
financial institutions. Monetary policy's most important
contribution to economic stability is to maintain monetary
value through low and stable inflation.
For over 10 years global interest rates have been
historically low. Now that growth has picked up, there are
prospects of a gradual rise in interest rates among our trading
partners. However, structural conditions have reduced the
global neutral interest rate. As conditions normalise, interest
rates are not likely to reach the same level as they were a few
The outlook for the Norwegian economy also entails that it
will be appropriate to gradual increase the key policy rate.
Growth has gained momentum and unemployment has fallen.
Underlying inflation is below the inflation target, but the
driving forces indicate that it will rise.