The government recognised that the repeated devaluations were ineffectual. Confidence had been lost. In Norway, inflation had also soared without a fall in unemployment. Even if it was costly to restore credibility, in reality we had no choice. 29 The alternative was to bring the country even closer to the brink of financial chaos and runaway inflation. The devaluation in 1986 would become the last in the series. Internationally, the 1980s ushered in three innovations that would become decisive for the design of modern monetary policy as we know it today. -  First, market deregulation led to freer cross-border capital flows. Promises could no longer be relegated to the future. Failing credibility was promptly reflected in higher interest rates and weaker exchange rates. Nixon’s disinflation plan to bring down inflation at some point in the future would have had immediate consequences. On the other hand, it also became clear that a credible and transparent monetary policy could be more effective precisely thanks to financial markets’ swift reactions. 30  -  Second, the notion of central bank autonomy regained favour. The political authorities, who wanted to show the world that they were committed to delivering their promise of price stability, did as Ulysses and tied themselves to the mast. The mechanism was central bank independence and Norway was no exception. The new Norges Bank Act of 1985 gave Norges Bank the authority to set the interest rate.
As has happened under different circumstances, any movements of the exchange rate away from the trend assumed as a working assumption is possible in a floating regime, and its potential effects on the financial system, output or employment will be considered by the Board as inputs for their future decisions. Summarizing, for the rest of this year, annual CPI inflation is expected to return to figures around 3% to then move to the upper limit of the tolerance range for some months. This short-term trajectory is influenced by one-time effects, which will eventually revert, permitting inflation to hover around 3% throughout 2011 and to the end of the relevant projection horizon, this time the third quarter of 2012. Y-o-y CPIX1 inflation will describe a more gradual convergence to 3%, largely because the shorter-term effects on inflation are concentrated in items outside the CPIX1. Private expectations are not very different from this (figure 10). The Board estimates that it will continue withdrawing the monetary stimulus at a pace that will depend on how domestic and external macroeconomic conditions unfold. This process of MPR normalization was begun in June and continued in the meetings of July and August – with increases of 50 basis points each time – taking the MPR to 2% y-o-y. Going forward, the market has internalized a process of withdrawal of the monetary stimulus in the coming quarters. This is consistent with the progressive normalization of credit conditions, which is visible in various markets and indicators.