Norges Bank’s monetary policy strategy
Norges Bank’s Monetary Policy and Financial Stability Committee has published its monetary policy. The strategy describes the Committee’s interpretation of the monetary policy mandate and provides a framework for the conduct of monetary policy in response to different shocks to the economy. The strategy does not entail a change in the conduct of monetary policy but articulates and elaborates on the Committee’s interpretation of the mandate.
The primary objective of monetary policy is low and stable inflation. Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to countering a build-up of financial imbalances.
“Provided there is confidence in low and stable inflation, variations in inflation around the target of 2 percent are not likely to engender any significant economic costs. The Bank will, however, give weight to avoiding large and persistent deviations from the inflation target, whether above or below the target”, says Governor Øystein Olsen.
The aim of stabilising inflation around 2 percent is weighed against the aim of economic stability. The strategy provides a more detailed articulation than earlier of the economic costs of downturns.
“High unemployment involves losses in aggregate income and output and economic and health consequences for those unable to find employment. Low unemployment, on the other hand, does not involve any direct costs. As such, the Bank will not normally aim to quickly dampen a high level of activity in the economy as long as there are prospects that inflation will remain within a range close to 2%, and there are no signs of financial imbalances building up”, says the Governor.
In some situations, there may be a conflict between economic stability in the short and long term.
“An expansionary monetary policy can cause house prices and debt to rise to such a high level that it conflicts with the aim of long-term stability. This could provide grounds for starting to normalise the policy rate slightly earlier than suggested by the need to support activity in the short term", says Governor Øystein Olsen.