Norges Bank emphasises that budget tightening effect must not be weakened
In its annual submission to the Ministry of Finance concerning the budget programme for next year, Norges Bank states that a tightening of fiscal policy on the scale proposed by the Government could contribute to facilitating the implementation of monetary policy.
"Norges Bank views the tightening proposed by the Government as appropriate and necessary. It is crucial that the budget deliberations in the Storting (Norwegian parliament) do not contribute to weakening the overall tightening effect of the proposed programme," the submission states.
Norges Bank points out that over time a credible objective of exchange rate stability against European currencies implies that Norwegian interest rates will have to move in line with European interest rates. Given the division of responsibility for economic policy, fiscal policy must be oriented towards creating room for a decrease in interest rates towards European levels without this giving rise to persistent imbalances and pressures in the economy, asserts the Central Bank.
The Bank further underlines that there is a substantial risk that an insufficient tightening of fiscal policy will gradually lead to a situation where inflation may be considerably higher in Norway than in other countries, and where high price and wage inflation may become a dominant problem in the Norwegian economy.
Norges Bank bases its submission on the Government's views concerning the division of responsibility for economic policy. In accordance with the Exchange Rate Regulation, Norges Bank orients its instruments towards stabilising exchange rate movements based on the initial range defined in the Regulation. The Bank notes that the responsibility for economic stabilisation rests with fiscal policy.
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