The Government has defined an inflation target for monetary policy in Norway. Norges Bank's conduct of monetary policy shall be oriented towards low and stable inflation.
The operational target of monetary policy shall be annual consumer price inflation of close to 2.5 per cent over time. Monetary policy shall also contribute to stabilising output and employment.
In general, direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account. In real time it will always be difficult to determine which price movements are permanent and those which only have short-term effects on the CPI. There is no one indicator that provides a precise picture of underlying inflationary pressures in all situations. Different measures of underlying inflation are discussed in Monetary Policy Report.
Implementation and horizon
Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment.
Monetary policy influences the economy with long and variable lags. Norges Bank sets the interest 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 how they affect the path for inflation and the real economy ahead.
Monetary policy instruments
Norges Bank's most important monetary policy instrument is the key policy rate, which is the interest rate on banks' deposits up to a quota in Norges Bank.
The key rate influences short-term money market rates. The key rate and expectations concerning future developments in the key rate are decisive for banks' deposit and lending rates and for bond yields.
In addition to changing the key 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 prospect of 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
Norges Bank's Executive Board sets the key rate. The Executive Board is appointed by the King in Council, and is made up of the Governor, the Deputy Governor and five external members. The Executive Board functions as a unified group and the members are collectively responsible for the Bank's decisions.
Decisions concerning interest rates and other important changes in the use of instruments will normally be taken at the Executive Board's monetary policy meeting six times a year. The analyses and the monetary policy strategy presented in Norges Bank's Monetary Policy Report, together with assessments of price and cost developments and conditions in the money and foreign exchange markets, form a basis for monetary policy decisions.
The main features of the analysis in the Monetary Policy Report are presented to the Executive Board for discussion at a meeting about two weeks before the report is published. Themes of relevance to the report have been discussed at a previous meeting. On the basis of the analysis and discussion, the Executive Board assesses the consequences for future interest rate developments and adopts a monetary policy strategy, including alternative strategies. The decision to adopt a monetary policy strategy is made on the same day as the report is published. The strategy applies for the period up to the next Monetary Policy Report and is presented in the report. From 2002 to 2004 the monetary policy strategy was published as a separate Strategy Document.
The monetary policy decision and advice on countercyclical capital buffers are announced at 10 am the day after the meeting of the Executive Board.
At the same time, the Executive Board's monetary policy statement is published. The statement provides an account of the main aspects of economic developments that have had a bearing on the interest rate decision and the Executive Board's assessments.
The press release, the Executive Board's monetary policy statement and package of charts that form part of the background to the discussion at the monetary policy meetings are available on our website.
A press conference is held at 2 pm at which the central bank governor or deputy governor explains in more detail the reasons behind the Executive Board's decision. The press conference is webcast from Norges Bank's website.
Reporting and evaluation
Norges Bank reports on the conduct of monetary policy in the Monetary Policy Report and the Annual Report. 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 the Government's Financial Markets Report. The Governor of Norges Bank provides an assessment of monetary policy in an open hearing before the Standing Committee on Finance and Economic Affairs in connection with the Storting deliberation on the Financial Markets Report.
Developments in inflation, adjusted for some temporary factors, provide a basis for assessing the monetary stance. It is important in this context that the operational objective of monetary policy is a rise in consumer prices of close to 2.5 per cent over time, and not an inflation rate of this magnitude at all times. The precision in attaining the inflation target that can reasonably be expected from monetary policy must also be taken into account.
Norges Bank expressed its views on the monetary policy mandate in its submission to the Ministry of Finance of 27 March 2001. The submission stated the following: "If there are significant deviations between actual price inflation and the target, the Bank will provide a thorough assessment in its annual report. Particular emphasis will be placed on any deviations outside the interval of +/- 1 percentage point."