But one day you find out that you have diabetes. If you continue to eat the same amount of cakes, your health will be at risk in the near future. If you want to continue eating cakes, the solution is simply to get a direct medicine that lowers the sugar level in your blood. But what if the effect of the medicine takes a long time to become effective? For his survival, the patient has no option but to reduce the amount of cakes intake. This is exactly what the monetary policy is doing. It is a demand management tool to augment supply measures that take time to make an impact. If the effect of supply-side policy, the direct medicine for supply shock, is limited and rising inflation is a threat to the health of the economy, one must forego the happiness today for a better future tomorrow. Ladies and Gentlemen, You may then ask where the evidence of the demand pressure is. Looking around, everywhere people seem to be tightening their belts and saving for the rainy days. Here, I would like to highlight the readily accessible indicators on capacity utilization and unemployment. Partly due to strong demand for Thai products abroad, the average capacity utilization rate for the first five months of this year was the highest since the 1997 crisis. Meanwhile, despite the unofficial figure of 2-2.5 million labour immigrants, the unemployment rate has been hovering around 1.5% during the past four months.
The deposit rate forms the floor for the shortest money market rates. Transparency about intentions, strategies and the implementation of monetary policy makes it easier for economic agents to assess monetary policy. If monetary policy is predictable, an important source of uncertainty is reduced, and – other things equal – the interest rate required to achieve the inflation target will be lower. If economic agents are to have confidence in monetary policy, transparency regarding the central bank’s response pattern is probably a precondition. The interest rate affects inflation through a number of channels. An increase in the interest rate will normally contribute to reducing inflation by curbing demand for goods and services and by strengthening the krone exchange rate against other currencies. An interest rate reduction has the opposite effect. Monetary policy influences the economy with considerable and variable lags. Our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. Two years is therefore a reasonable time horizon for achieving the inflation target of 2½ per cent. Interest rates are set with a view to achieving an inflation rate of 2½ per cent two years ahead. Norges Bank’s views on the inflation outlook are presented three times a year in the Inflation Report. Our projection for inflation in the period ahead is presented as well as our assessment of the balance of risks surrounding this projection. The Executive Board’s updated assessments are presented in connection with the monetary policy meetings every six weeks.