The policy rates of many of Norway's main trading partners are now at their highest levels since the 2008 financial crisis. Chart 6: Policy rates have been raised more abroad than in Norway Since last spring, foreign interest rates have risen more than Norwegian interest rates. Combined with the turmoil in financial markets, this has likely contributed to the krone depreciation. Norges Bank is mandated by the Ministry of Finance to carry out the foreign exchange transactions necessary under the petroleum fund mechanism. In the current period, Norges Bank's krone sales reflect the sizeable foreign currency revenues earned by oil and gas companies owing to high gas prices. The companies have converted large amounts of foreign currency into NOK for tax payment purposes. Norges Bank, on behalf of the government, will convert the portion of government petroleum revenues in NOK that is not spent via the central government budget back into foreign currency, which is then deposited in the Government Pension Fund Global. The transactions are planned and smoothed over the year and are announced ahead of each month. These currency conversions are not an element of monetary policy. Chart 7: The krone has depreciated Norway has a floating exchange rate. This means that the policy rate can be set at the level appropriate for the outlook for the Norwegian economy, and we have room to practice flexible inflation targeting, which also enables monetary policy to give weight to the aim of maintaining high employment.
Along with the ongoing monetary policy normalization in the US economy, the new US fiscal package and its impacts on the economy also absorbs attention. In the EU, as already clearly announced, the accommodative monetary policy, although with lower amount of assets purchase, is expected to apply by September this year or beyond and interest rate changes to take place later. However, the positive global outlook has still been surrounded by various risks, including the still pending outcome of Brexit negotiations, geo-political risks and the possible protectionism measures by the US administration. However, besides the sound and wide spread recovery, an important feature of the global environment is the generally subdued inflation, not always in line with the model-based forecasts and standard empirical findings. In this view, the flattening of the Phillips curve based on current economic data, points to possible altering of the standard relation between the economic cycle and inflation, raising discussion on one of the basic empirical findings in the macroeconomics in the academic and central banking community. The subdued inflation nowadays is mainly due to global factors that are not exclusively related to the commodity prices fluctuations, but also to the impacts of the globalization of production and digitalization of trade worldwide, both having impact on competition and prices in each economy. In such surrounding of prolonged lower inflation, the re-assessment of the time lag in affecting the inflation as well as the inflation measurement, the outlook of inflation expectations and their possible de-anchoring are to be considered.