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
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
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
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.