National Budget 2003

National Budget 2003

Economic Policy - Monetary Policy

Box 2 Regulation on Monetary Policy
Established by Royal Decree of 29 March 2001 pursuant to Section 2, third paragraph, and Section 4, second paragraph, of the Act of 24 May 1985 no. 28 on Norges Bank and the Monetary System

I

§1.

Monetary policy shall be aimed at stability in the Norwegian krone's national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment.

Norges Bank is responsible for the implementation of monetary policy.

Norges Bank's implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time.

In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account.

§2.

Norges Bank shall regularly publish the assessments that form the basis for the implementation of monetary policy.

§3.

The international value of the Norwegian krone is determined by the exchange rates in the foreign exchange market.

§4.

On behalf of the State, Norges Bank communicates the information concerning the exchange rate system ensuing from its participation in the International Monetary Fund, cf. Section 25, first paragraph, of the Act on Norges Bank and the Monetary System.

II

This regulation comes into force immediately. Regulation no. 0331 of 6 May 1994 on the exchange rate system for the Norwegian krone is repealed from the same date.

A new regulation on monetary policy was established 29 March 2001. The new guidelines stipulate that monetary policy shall be aimed at stability in the internal and external value of the krone, contributing to a stable exchange rate.

In accordance with this, Norges Bank's implementation of monetary policy shall be aimed at maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices close to 2.5 per cent over time. Monetary policy shall be forward-looking, and direct effects on consumer prices stemming from changes in interest rates, taxes, excise duties and extraordinary, temporary disturbances, shall in general not be taken into consideration. It is expected that consumer price inflation, as a general rule, will be within a 1 percentage point deviation of either side of the target.

The monetary policy guidelines of 29 March 2001 assign to monetary policy a clear-cut role in stabilising economic developments. Low and stable inflation is important in ensuring stable production and employment and will also contribute to exchange rate stability over time.

Norges Bank lowered its key rate on one occasion in 2001, by 0.5 percentage points to 6.5 per cent on 12 December. That reduction was reversed at the executive board meeting on 3 July this year when the key rate was raised by 0.5 percentage points to 7 per cent. At the same time the Bank stated that, given an unchanged interest rate ahead, inflation was more likely to be higher than 2½ per cent than lower on a two-year timescale. Norges Bank largely justified the rate increase with reference to the outcome of this year's wage negotiations, and the bank also expects wage growth to remain high in the years ahead. The Bank left its key rate unchanged at its interest rate meeting on 18 September 2002. However, it revised its assessment of the risk picture ahead stating that, given an unchanged interest rate, inflation was just as likely to be higher than 2½ per cent as lower on a two-year timescale.

The value of the Norwegian krone has risen markedly in the last couple of years. In 2001 the krone's trade-weighted index value rose by 4 per cent, and so far this year by a further 8½ per cent. Last year's appreciation was related to the weakening of the Swedish currency. This year the Norwegian krone has appreciated against most currencies. Against the euro and the US dollar the krone has strengthened by 7½ per cent and 16 per cent respectively since year-end.


Chart 2.5 Policy rates. Per cent

Source: EcoWin

The krone appreciation may reflect the view the Norwegian economy is strong compared with other countries. Capacity utilisation is high, unemployment low and the petroleum revenues give sizeable surpluses in both the balance of payments and the fiscal budget. The petroleum revenues are essentially invested abroad by means of the Petroleum Fund. This is crucial to preventing fluctuations in oil revenues from directly spilling over into the krone exchange rate.