In its conduct of monetary policy, Norges Bank places emphasis on satisfying the fundamental preconditions for exchange rate stability against the euro: instruments must be oriented with a view to reducing price and cost inflation to the level aimed at by the European Central Bank (ECB). At the BIS Review 105/2000  8  same time, monetary policy must not in itself contribute to deflationary recessions, as this could undermine confidence in the krone. According to the Maastricht Treaty, the main objective of the ECB is the maintenance of price stability. The ECB has defined price stability as inflation of less than 2%. Inflation in Norway cannot remain higher than inflation in the euro area year after year without this having consequences for the exchange rate of the Norwegian krone against the euro. If price and cost inflation remains higher than the rate of increase aimed at by the ECB over a long period, our experience indicates that the krone will depreciate against the euro sooner or later. Norges Bank must therefore counter such a development. There are institutional differences between the Norwegian monetary policy regime and monetary policy in countries with an inflation target. Norges Bank will inform the government authorities (via the Ministry of Finance) if measures other than those available to the central bank are required in the event that the krone exchange rate cannot be returned to its initial range without creating inflation or a deflationary recession.
Monetary policy decisions usually include a statement of bias, ie the probability that the next change in interest rates will be an increase or a reduction. At the same time as the press release, a press conference is held at which a more detailed account of the background for the decision is given. BIS Review 105/2000  14  15  BIS Review 105/2000  On 20 September this year, Norges Bank decided to increase its key interest rate, the deposit rate, by 0.25 percentage point to 7%. This has brought the overall increase in interest rates this year to 1.5 percentage points. This has happened in a climate of interest rate rises in other countries and a relatively weak effective krone exchange rate. Moreover, the past year has seen increased risk that price and cost inflation may remain considerably higher in Norway than in other European countries. Norges Bank had no choice but to counter this, in order to satisfy the fundamental preconditions for exchange rate stability. This is why the Bank has raised its key rates. I would like to conclude by once again thanking you for inviting me to give this account of the basis for Norwegian monetary policy. References: Akram, Q F (2000): “PPP despite real shocks: An empirical analysis of the Norwegian real exchange rate”. Working paper 2000/7, Norges Bank, Oslo.