Countries that have attempted to shield their economies from the rest of the world have fallen back into stagnation. Nascent signs of increased protectionism are again giving cause for concern. If this tendency intensifies, international trade and prosperity will be undermined. With its open economy, Norway would be severely affected. It is in our own interest to make an active effort to counteract such a development. Monetary policy – a nominal anchor Against the background of an economic downturn and low interest rates among Norway’s trading partners, the conduct of monetary policy in Norway is challenging. A higher key policy rate might have curbed debt growth and demand pressures in the Norwegian economy. But in an environment of persistently low external interest rates, such a policy would likely have led to a sharp appreciation of the krone, resulting in too low levels of inflation and economic activity. Thus, the crisis in Europe and weak growth in the US are also contributing to keeping interest rates in Norway at a low level. BIS central bankers’ speeches  3  The main objective of monetary policy in Norway is low and stable inflation. This objective provides the economy with a nominal anchor. With firmly anchored inflation expectations, monetary policy can contribute to stable developments in the real economy. Chart 7: Rise in consumer prices The operational target of monetary policy is annual consumer price inflation of close to 2.5 percent over time. Over the past ten years, average inflation has been somewhat below, but close to, 2.5 percent.
Over the past 20 years, nominal mainland GDP has increased by around 6 percent annually, and growth is still hovering around that trend. There were some tendencies towards overheating in the years prior to the financial crisis. Price and cost inflation in the Norwegian economy picked up markedly. But the correction that followed during and after the crisis has brought growth back to trend. There is little in this chart to indicate that the world economy has recently been through the most severe economic downturn in post-war history. 6  BIS central bankers’ speeches  The picture changes when growth is broken down into price and volume. The high prices for domestically produced goods are the main factor that has supported our country’s income. Since 2005, producer prices have increased considerably faster than trend. This illustrates that mainland businesses have also benefited from the substantial improvement in Norway’s terms of trade. Chart 13: Mainland GDP – slump in economic activity Economic activity, on the other hand, slumped during the financial crisis. Although economic growth has picked up in the past few years, the level is still clearly below the pre-crisis trend. This would indicate that the financial crisis and the debt crisis have had lasting effects on the Norwegian economy as well. Chart 14: Mainland GDP – per capita The picture becomes even clearer when population growth is factored in. Measured per capita, we do not generate more value today than we did five years ago. This picture is similar to that of other advanced economies.