Monetary policy

The current regulation on monetary policy was established 29 March 2001 in a white paper to the parliament (Report No. 29 (2000-2001). 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.

The current regulation on monetary policy was established 29 March 2001 in a white paper to the parliament (Report No. 29 (2000-2001). 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 stabilizing output and employment developments, and to creating stable expectations about exchange rate developments. As a general 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 Stortinget that the interest rate decisions of Norges Bank shall be forward-looking, and pay attention to the uncertainty in 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 regulation stipulates 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. In most situations the need for stabilizing inflation will be in accordance 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.

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.

Norges Bank has expressed a set of criteria which can serve as a guideline for an appropriate interest rate path:

  1. The inflation target is achieved:
    The interest rate should be set with a view to stabilising inflation at target or bringing it back to target after a deviation has occurred.

  2. The inflation targeting regime is flexible:
    The interest rate path should provide a reasonable balance between the path for inflation and the path for overall capacity utilisation in the economy.

  3. Monetary policy is robust:
    The interest rate should be set so that monetary policy mitigates the risk of a build-up of financial imbalances, and so that acceptable developments in inflation and output are also likely under alternative assumptions about the functioning of the economy.
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