Last year our Agents – Adrian and Ian – drove 30,000 miles to talk faceto-face with you. The rugged scenery is, I suspect, less appealing to them as they wind their way – slowly – through the valleys and mountains. When you talk to them, you are speaking to the Monetary Policy Committee at only one remove before it sets interest rates. On this occasion, I am not in Wales to enjoy the scenery. I am here to listen to your views at first hand. But tonight I want to explain. Over the past year Bank Rate has risen four times to reach 5½%. A year ago, few expected that to happen – markets thought that by now Bank Rate would be only 4¾%. Market expectations of where Bank Rate will be at the end of this year have risen from 5% in the middle of last year to 6% now. So what has happened over the past twelve months? The right place to start is with inflation – that is, after all, the Bank of England’s target. A year ago inflation was bang on the 2% target. The latest figure – for April – is 2.8%. In recent months inflation has been volatile, rising to above 3% in March, when I had to write an open letter to the Chancellor, and subsequently falling back. The number for May, to be published tomorrow, is awaited with interest. Many column inches have been devoted to these short-run movements.
9) Formulation of monetary policy Norges Bank reduced its key rates by 0.5 percentage points effective from today. This decision came in response to developments in money and foreign exchange markets and the prospect of reduced pressures in the real economy. The outlook for the Norwegian economy has changed since Norges Bank raised its key rates in August. The forecasts for growth in the world economy have been revised downwards and persistently low oil prices have reduced demand in the oil sector. In addition, a tight government budget for 1999 and the high interest rate level are having a restraining effect on growth. At the same time, the krone has appreciated recently. This lays the foundation for slower price and wage inflation in the years ahead, as estimated by Norges Bank in its December Inflation Report. Developments in recent weeks have confirmed this picture, providing room for a slight reduction in interest rates. According to the Exchange Rate Regulation, “... in the event of significant changes in the exchange rate, monetary policy instruments shall be oriented with a view to returning the exchange rate over time to its initial range”. The guidelines provide considerable scope for discretion in the conduct of monetary policy. It is Norges Bank’s task to exercise this discretion. Interest rates are set with a view to returning the krone exchange rate over time to its initial range. Even with this interest rate reduction, the interest rate differential against European countries is substantial.