Norway Central Bank Statement

Author: | Published: 19 Oct 2018
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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 employment.

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 real economy.

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 decades ago.

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.

 

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