What is monetary policy?
Monetary policy is about how the policy rate influences variables such as inflation and economic growth.
Money is essential in an economy. We pay with money, we save money and money serves as a standard measure of value. In order for money to fulfil these functions, we must be able to trust that the value of money remains stable over time.
The Stortinget (Norwegian Parliament) and the Government have charged Norges Bank with the task of ensuring a stable Norwegian krone through low and stable inflation. All the measures implemented by the Bank to achieve that aim is monetary policy.
The most important target is low and stable inflation
With low and stable inflation, we trust that money can be exchanged for a predictable amount of goods and services in the future. This makes it easier for us to plan our finances and make sensible economic choices.
In a regulation on monetary policy, the Government has defined low and stable inflation as annual consumer price inflation of close to 2 percent over time.
Because inflation is the most important monetary policy target, we say that monetary policy in Norway has an inflation target and the monetary policy regime is referred to as inflation targeting. This is also the case in countries such as Sweden, the euro area, the UK, the US and Canada.
Economic stability is another important target
At the same time, monetary policy in Norway should be flexible in order to contribute to high and stable output and employment and restrain the build-up of financial imbalances
In practice, this means that Norges Bank may allow inflation to deviate from the inflation target during certain periods if justified by these other important considerations.
The policy rate is the most important instrument
The most important monetary policy instrument is the interest rates on banks’ deposits and loans in Norges Bank, and the most important rate among these is the policy rate.
The policy rate is set by the Monetary Policy and Financial Stability Committee at its monetary policy meetings. The Committee usually has eight monetary policy meetings a year.
The Monetary Policy Report provides overview, insight and outlook
Norges Bank publishes the Monetary Policy Report with financial stability assessment four times a year. The Report describes the situation in the Norwegian and global economy, and presents a picture of Norges Bank’s expectations concerning future developments in the policy rate, inflation and the wider economy.