The Government has defined an inflation target for monetary policy in Norway. Monetary policy shall maintain monetary stability by keeping inflation low and stable.
The operational target of monetary policy shall be annual consumer price inflation of close to 2 percent over time.
Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to counteracting the build-up of financial imbalances.
Implementation and horizon
Monetary policy works with a lag. Norges Bank sets the key policy rate with a view to stabilising inflation close to the target in the medium term. The relevant horizon will depend on disturbances to which the economy is exposed and the effects on the outlook for inflation and the real economy. In its conduct of monetary policy, Norges Bank will take into account indicators of underlying consumer price inflation. Different measures of underlying inflation are discussed in the Monetary Policy Report. As long as there is confidence that inflation will remain low and stable, monetary policy can contribute to smoothing fluctuations in output and employment. Nevertheless, monetary policy cannot assume primary responsibility for high output and employment.
Monetary policy instruments
Norges Bank's main monetary policy instrument is the key policy rate, which is the interest rate on banks' deposits up to a certain quota in Norges Bank.
The key policy rate influences short-term money market rates. The key policy rate and key policy rate expectations are decisive for banks' deposit and lending rates and for bond yields.
In addition to changing the key policy rate, Norges Bank can buy or sell NOK (intervene) in the foreign exchange market in order to influence the krone exchange rate. Norges Bank has the capacity to intervene in the foreign exchange market, but normally the Bank will not use interventions. Exchange market intervention, irrespective of whether currency is bought or sold, is not an appropriate instrument for influencing the krone over a longer period. However, interventions may be appropriate if the krone deviates substantially from the level that the Bank judges to be reasonable in relation to fundamentals, and if exchange rate developments weaken the prospects for achieving the inflation target. Interventions may also be appropriate in response to pronounced short-term fluctuations in the krone when liquidity in the foreign exchange market falls to a very low level. Norges Bank has not intervened in the foreign exchange market since January 1999.
The decision-making process
The main features of the analysis in the Monetary Policy Report are presented to the Executive Board for discussion at a meeting one to two weeks before the Report is published. On the basis of the analysis and discussion, the Executive Board assesses the consequences for future interest rate developments. The final decision on the key policy rate is normally made on the day prior to the publication of the Monetary Policy Report.
Communication of the key policy rate decision
The key policy rate policy decision and Norges Bank's advice on the countercyclical capital buffer are published in a press release at 10:00 the day after the monetary policy meeting.
The Executive Board's assessment is published at the same time. The assessment provides an account of both the main aspects of economic developments that have had a bearing on the key policy rate decision and the Executive Board's judgements.
The press release and the Executive Board's assessment underlying the key policy rate decision are available on our website.
In connection with four of the monetary policy meetings, the Monetary Policy Report is also published. A press conference is held 10:30 where the Governor further explains the Executive Board's decision. The press conference is webcast live.
Reporting and evaluation
Norges Bank reports on the conduct of monetary policy in the Annual Report. The assessments that form the basis for the implementation of monetary policy will be published regularly in the Monetary Policy Report and elsewhere.
The Bank's reporting obligation is set out in Article 75c of the Constitution, which stipulates that the Storting shall supervise Norway's monetary system, and in Section 3 of the Norges Bank Act. The Annual Report is submitted to the Ministry of Finance and communicated to the King in Council and to the Storting in the Government's Financial Markets Report. The Governor provides an account of monetary policy in an open hearing before the Standing Committee on Finance and Economic Affairs in connection with the Storting deliberations on the Financial Markets Report.