Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 21 May 2013. *  *  *  Please note that the text below may differ from the actual presentation. I would like to thank the Chairman of the Committee and thank you for this opportunity to report on the conduct of monetary policy in connection with the Storting’s deliberations on the Government’s Financial Markets Report. My statement here today is based on the Bank’s Annual Report, but also on the Executive Board’s assessments for the period to the most recent monetary policy meeting and new information. When I was here last year, the key policy rate had been reduced by 0.25 percentage point to 1.5 percent in March. The key policy rate has since been kept unchanged. The key policy rate is low because inflation is low and because external interest rates are at very low levels. The year 2012 was characterised by weak growth among Norway’s trading partners and turbulence in financial markets. Uncertainty about global economic developments, particularly in Europe, was high. Key rates in many countries were close to zero, and both the European Central Bank (ECB) and the Federal Reserve announced that key rates would be kept low for a long period. Economic developments in many advanced economies remained weak into 2013.
The aim is to ensure that the analytical basis is consistent with the formulation of monetary policy. The objectives of the countercyclical capital buffer and the key policy rate are different. The objective of the buffer is to strengthen banks’ resilience to losses in an economic downturn, while the objective of monetary policy is low and stable inflation over time. The inflation target is weighed against the aim of smoothing fluctuations in output and employment. The new instrument will be taken into account in monetary policy. Both the key policy rate and the buffer work through banks’ responses. The buffer will be set on the basis of an assessment of the risk that financial imbalances may trigger or amplify an economic downturn. Capital adequacy requirements, and their effect on bank lending rates, will be one of many factors underlying the monetary policy analysis and interest rate setting. The countercyclical capital buffer will strengthen the resilience of the banking sector during an upturn. It may also, to some extent, counteract the build-up of financial imbalances. But the effect on bank behaviour is uncertain. Thus, Norges Bank cannot disregard financial imbalances when setting the key policy rate. The criteria for the conduct of monetary policy remain firm also after the introduction of a countercyclical capital buffer. When assessing the various considerations, monetary policy must pursue its primary objective – low and stable inflation. We cannot overburden monetary policy. Other economic objectives must be pursued using policy tools such as financial regulation, the tax system and fiscal policy.