The purpose of the measures has been to prevent their own currencies from appreciating in order to prevent inflation from falling and keep it closer to the inflation target than would otherwise have been the case. Foreign exchange market measures can be effective if there is a risk that confidence in the nominal anchor is being undermined by prospects for low inflation and it is not appropriate to lower the policy rate further. However, this type of measure also exposes the central bank’s equity to greater risk. In Norway, foreign exchange market intervention is not applicable in a normal situation. Division of responsibilities and level of ambition for economic policy Let me draw together the strands of my discussion so far. The introduction of the inflation target in 2001 laid the premises for today’s division of responsibilities in the conduct of Norway’s economic policy. Monetary policy pursues the objective of low and stable inflation and is the first line of defence in stabilising the economy. Fiscal policy contributes to stability within the framework of the fiscal rule. This framework has served us well for almost 20 years. The Norwegian economy is currently performing well, while there are some dark clouds on the international horizon. Hopefully, we are only seeing a period of slower growth, but a severe downturn cannot be ruled out. If such a downturn were to occur with policy rates as low as they are now, monetary policy space for major economies would be very limited.
As I have mentioned, there is probably less to gain from lower long-term rates in Norway than in countries that have used unconventional instruments to reduce rates. And the effects of such instruments are now also being called into question internationally. The costs are particularly related to financial stability. Persistently low interest rates can induce investors to take on greater risk in the search for yield, bidding up the price of risky investments and pushing down yields to the level of risk-free interest rates. Prices for securities and other assets can be pushed up higher than future income and risk would suggest. High debt ratios create vulnerabilities, increasing the risk of new crises and future losses. Persistently lower interest rates can also hamper necessary structural changes and reduce the economy’s growth capacity. Debt becomes easy to service, even for unprofitable enterprises. Projects that generate low returns can be debt-financed. Chart: Fiscal impulses The strategy pursued by other countries of stretching the limits of monetary policy must be viewed in the light of monetary policy being practically the only instrument applied. Fiscal policy has made a scant contribution or pulled in the opposite direction. There are probably a number of reasons why this is the case. For some countries with high government debt, the risk of rising interest expenses restricted fiscal room for manoeuvre. At the same time, fiscal policy is managed at national government level.