Summary
Money market rate premiums have been high and volatile. The difference between money market rates and central bank key rates has been the widest since the international financial turbulence started in August last year. Norwegian money market rates increased sharply after international risk premiums spilled over into the Norwegian market. Foreign exchange markets have also been volatile. Investors have shown interest in the large and most liquid currencies. Growth is also slowing in the Norwegian economy. Household consumption has stagnated and house prices are falling. Monetary policy in Norway is oriented towards annual consumer price inflation of close to 2.5% over time. In recent years, inflation has on average been somewhat lower, but fairly close to 2.5%. A deep and protracted global downturn may drag down activity in Norwegian export industries further and have ripple effects on other business sectors. The economy is influenced by the abnormal conditions in financial markets. Domestic demand is influenced through several channels.
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Extract
Monetary Policy Report 3/2008
Monetary policy in Norway
ObjectiveThe operational target of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time.ImplementationNorges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances are not taken into account.Monetary policy influences the economy with a lag. Norges Bank sets the interest rate with a view to stabilising inflation close to the target in the medium term. The horizon will depend on disturbances to which the economy is exposed and the effects on prospects for the path for inflation and the real economy.The decision-making processThe 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, including alternative strategies. The final 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 Report and is presented at the end of Section 1 in the Report.The key policy rate is set by Norges Bank's Executive Board. Decisions concerning the interest rate are normally taken at the Executive Board's monetary policy meeting every sixth week. The analyses and the monetary policy strategy, together with assessments of price and cost developments and conditions in the money and foreign exchange markets, form a basis for interest rate decisions.Communication of the interest rate decisionThe monetary policy decision is announced at 2 pm on the day of the meeting. 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 Bank holds a press conference at 2:45 pm on the same day. The press release, the Executive Board's monetary policy statement and the press conference are available on www.norges-bank.no.ReportingNorges 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 Section 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 Government's Kredittmeldingen (Credit 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 deliberations on the Credit Report.EditorialLower interest rate curbs impactActions taken by the authorities in many countries seem to have warded offa collapse of the world's banking systems. Nevertheless, the uncertainty surrounding economic developments ahead is unusually high. It is fairly certain that the world economy will experience a meagre year ahead. In Norway, the effects of the financial crisis will also occur more rapidly and be more pronounced than the outlook seemed to imply only recently. Norway is still in a better position than most countries. The current account balance and government finances are solid. The Norwegian banking system is not large, and the financial position of Norwegian banks is sound. Moreover, the level of domestic activity remains high and inflation expectations are well anchored.The krone has depreciated substantially. As long as inflation is low and stable, the krone acts as an automatic stabiliser. Lower prices in foreign currency and reduced demand for our export products are being counteracted by the fall in the value of the krone. However, there have been wide variations, and the krone is expected to appreciate as the conditions in money and foreign exchange markets improve.The analysis in this Report implies, both in the short term and the somewhat longer term, a lower key policy rate than projected in June. Weight is given to moving forward the reduction in the key policy rate so that bank lending rates for households and firms are gradually reduced. Norwegian banks, households and some businesses have increased their borrowings considerably in recent years. It is important that the necessary deleveraging does not take place too abruptly. Lower interest rates, combined with liquidity measures, may curb the impact of the financial crisis on output and inflation.Svein Gjedrem29 O...See the full content of this document
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