In its annual budget submission to the Ministry of Finance, Norges Bank recommends a revision of the guidelines for monetary policy to provide greater flexibility in the conduct of monetary policy. However, the Bank recommends that the objective of a stable exchange rate be maintained.

As stated in the submission: "Greater flexibility in monetary policy, in order to avoid a considerable shift in the use of instruments in response to moderate variations in the exchange rate, can be achieved by various means. Norges Bank recommends that a broader exchange rate range towards which monetary policy is geared ("the initial range") be defined compared with the existing exchange rate regulation."

It is pointed out that pursuant to the Act on Norges Bank, the central bank is under the obligation "to inform the Ministry when, in the opinion of the Bank, there is a need for measures to be taken by others than the Bank in the field of monetary, credit or foreign exchange policy".

In its submission, Norges Bank presents its views on developments in the Norwegian economy and the formulation of economic policy. The submission is based on the budget proposal presented by the Jagland Government in Proposition no. 1 to the Storting (Norwegian parliament).

The Bank points out that the Norwegian economy is now experiencing its fifth year of vigorous economic growth, and so far there are few signs of a slowdown in growth.

According to submission: "There are many indications that the mainland economy is approaching capacity limits. Although further growth in demand can to some extent be met by higher imports, it must be assumed that continued robust growth in demand will steadily exert more pressure on production capacity in the economy."

Norges Bank is of the view that if fiscal policy alone is assigned responsibility for stabilising the economy, it is necessary to pursue a considerably more contractionary fiscal policy than proposed in the budget. In order to avoid increased pressure, growth in demand should be curbed fairly quickly so that production is adapted to the underlying growth in production capacity.

Norges Bank maintains that fiscal policy, as presented in Proposition no. 1 to the Storting, does not alone appear to provide a sufficiently solid basis for ensuring balanced growth and reducing pressures in the Norwegian economy. Furthermore, Norges Bank strongly advises against relying on a system where one is compelled to orient monetary policy in a given situation so that it amplifies cyclical fluctuations and reduces the stability of the economy.

Norges Bank underlines that there are problems associated with the division of responsibility between fiscal policy and monetary policy. Moreover, in the present situation monetary policy is contributing to amplifying cyclical fluctuations and the possibility of repeated appreciation pressure is increasing the risk of placing excessive strains on fiscal policy.

Norges Bank is of the view that it is necessary to consider a revision of the monetary policy framework with a view to enhancing its role in contributing to stable economic developments in order to reduce the risk of severe economic disturbances.

"In the current situation, this implies less emphasis on the continual achievement of the operational goal of a stable exchange rate in favour of the fundamental objectives of full employment and sustainable economic growth based on the assumption of continued low price and wage inflation," states the central bank.

The submission also discusses the possibility of a shift in monetary policy towards a direct target of low price inflation - a so-called inflation target - in order to stabilise the economy. Norges Bank does not recommend this approach, however, partly because of the uncertainty related to the effects of such a substantial revision of monetary policy on fiscal policy and incomes policy.

Executive Board member Eystein Gjelsvik maintains in his dissenting statement that it is not necessary to raise the question relating to monetary policy guidelines in the submission. He considers that the existing guidelines provide considerable flexibility in terms of the exchange rate in the short term.

Central Bank Governor Kjell Storvik takes note of the Government's decision to retain the existing exchange rate regulation in its supplementary budget proposition.

"The Government points out that some flexibility already exists in the conduct of monetary policy as the regulation does not stipulate a central rate and fluctuation margins for the krone. Furthermore, the Government points out that if appreciation or depreciation pressures on the exchange rate should become particularly strong, Norges Bank shall allow short-term fluctuations in the exchange rate, but orient the use of instruments so that the exchange rate is gradually returned to its initial range. Norges Bank takes note of the Government's assessment and decision," says Governor Kjell Storvik.