Monetary policy
A new
regulation on monetary policy was established 29 March 2001 in
a white paper to the parliament (Report 29 to the
Storting). The regulation stipulates that
monetary policy shall aim for stability in the domestic and international value
of the Norwegian krone. Norges Bank’s operational implementation of monetary
policy shall be aimed at low and stable inflation, defined as an annual
increase in consumer prices that remains close to 2½ pct. over time. It follows
from the regulations that monetary policy shall contribute to stabilising
output and employment developments, and to creating stable expectations as to
exchange rate developments. As a main rule, it is expected that consumer price
increases will fall within an interval of +/– 1 percentage point from the
inflation target. Furthermore, it is stated in Report 29 to the
Storting that the interest rate decisions of
Norges Bank shall be forward-looking, and pay due heed to the uncertainty
attaching to macroeconomic estimates and assessments. It shall take into
consideration that it may take time for policy changes to take effect, and it
should disregard disturbances of a temporary nature that are not deemed to
affect underlying price and cost increases.
The
long-term role of monetary policy is to provide the economy with a nominal
anchor. Over time, low and stable inflation is an important prerequisite for growth
and welfare. The regulations stipulate a flexible inflation target for monetary
policy. In the short and medium run, monetary policy shall balance the need for
low and stable inflation, on the one hand, against the need for output and
employment stability, on the other hand.
The
monetary policy guideline prescribes that Norges Bank shall aim at low and
stable inflation, but at the same time monetary policy shall contribute to
stabilising output and employment developments. In most situations the need for
stabilising inflation will be in accord with the need for stable output and
employment developments. In case of conflict, the discretionary monetary policy
element will have to balance these needs against each other.
In his annual address
on 19 February 2004, the Governor of Norges Bank stated, inter alia, the
following:
”Norges
Bank operates a flexible inflation targeting regime, so that weight is given to
variability in output and employment and inflation. The economy grows over
time. Output will in periods lie below trend growth and in others above trend.
Stabilising output growth means that one seeks to maintain actual output near
trend.”
The
guidelines stipulate that monetary policy shall be forward-looking. In Inflation
Report 2/04 Norges Bank states as follows:
”Monetary
policy influences the economy with long and variable lags. Norges Bank sets the
interest rate with a view to stabilising inflation at the target within a
reasonable time horizon, normally 1-3 years. The more precise horizon will
depend on disturbances to which the economy is exposed and how they will affect
the path for inflation and the real economy ahead”
As far as
concerns the discretionary trade-offs that have to be decided by Norges Bank in
exercising monetary policy, it follows from the monetary policy regulation that
the Bank shall balance inflation developments against the need for stability in
output and employment.
Section 1
of the monetary policy regulation stipulates that monetary policy shall aim for
stability in the domestic and international value of the Norwegian krone, and
hereunder also contribute to stable expectations as to exchange rate
developments. The operational objective for monetary policy is low and stable
inflation. In accordance with this, no specific target has been defined as to
the level of Norwegian krone exchange rate. Nevertheless, Norwegian krone
exchange rate developments are of considerable importance when determining
interest rates, because such developments affect inflation and output. The
mutual interrelationship between internal and external stability in monetary
values was addressed in Report No. 29 (2000-2001) to the Storting:
”For a
small, open economy, there is a close relationship between exchange rate
developments and domestic inflation. Exchange rate stability can contribute to
expectations of continued low inflation, which in turn influence both price and
wage setting. Stable economic developments, with moderate price and cost
inflation, are also a precondition for stable exchange rate developments over
time.”
Certain
changes were made to the monetary policy framework during 2003. Practise
respecting the appointment of members of the Executive Board has been changed,
with these no longer being nominated by political parties in the Storting. The
Standing Committee on Financial Affairs has embarked on an open hearing with
the Governor of Norges Bank in connection with its deliberation of the Credit
Report. Moreover, systematic evaluations of monetary policy have been expanded
in both the annual Credit Report
from the Ministry of Finance and in reports written outside the Ministry and
Norges Bank. The IMF, the OECD and Norges Bank Watch 2004 are of the view that
these are positive developments.
In the
2005 National Budget the Ministry states that low interest rates and high real
income growth has stimulated domestic demand, and the growth in private
consumption and housing investment has been strong. Household demand remains
the main driving force for growth both in 2004 and 2005. Weaker krone exchange
rate and stronger growth internationally has improved the outlook for the
exposed industries.
Low
interest rates over a long period can involve imbalances in the real economy
and in the financial system. Experience shows that the basis for financial
instability is built during periods with strong growth of debt and asset prices.
In Inflation report 2/04 Norges Bank underlines that analysis of debt burden,
asset prices and debt-servicing capacity is part of the basis of for interest
rate decisions. Furthermore, Norges Bank also emphasizes that the shift to a
flexible inflation targeting monetary policy regime has reduced the risk of a
sharp, simultaneous increase in interest rates and unemployment.
The
regulation on monetary policy is found here
(PDF-format, 4 kB)
Report
no. 29 (2000-2001) on guidelines for economic policy is found here
(PDF-format, 50 kB)
The
figures in the report are found here
(PDF-format, 9 kB)
The
accompanying press release can be found here
External link:
Norges Bank
