This reflects that cash is a costly alternative to electronic money for participants in these markets. Chart: IBOR rates in countries with negative policy rates The pass-through to ordinary bank rates is slower. Households and small enterprises can at relatively moderate cost avoid negative deposit rates by withdrawing cash. If banks offer these groups of customers below-zero deposit rates, the banks risk losing an important part of their funding. If deposit rates do not follow policy rates into negative territory, the pass-through to banks’ funding costs will gradually weaken, which will in turn dampen or eliminate the decrease in banks’ lending rates.4 In order to strengthen the pass-through to long-term market rates, a number of central banks have elected to provide clearer signals about future policy rates, known as forward guidance, in a situation where policy rates are approaching a lower bound and the economic recovery is still sluggish. Some central banks have linked their signals about future policy rates to specific economic indicators or a specific horizon. In Norway, signals about future policy rates have long been part of the ordinary conduct of monetary policy. Since 2005, our monetary policy reports have included the Bank’s own forecasts for the policy rate three to four years ahead. The policy rate path is the Bank’s best estimate and not a promise. We have had positive experience with this instrument. Asset purchases Over the past decade, a number of central banks have also begun to use a new instrument of monetary policy: the central bank balance sheet.
In order to clarify our deliberations in the assessment of future inflation, the Riksbank presents an inflation report four times a year. A number of indicators are reviewed in these reports, together with an assessment of future tendencies and a discussion of risks and opportunities in the field of inflation. Simplifying somewhat, an inflation forecast can be said to rest on two factors in particular: one is the relationship between supply and demand and the other is expected inflation. The difference between the actual level of demand and the potential level of production that can be combined with an unchanged rate of inflation is commonly referred to as the output gap. As BIS Review 8/1997  -3-  this gap is a notional variable, it is difficult to calculate exactly. We therefore use a variety of indicators to check for consistency of the assessments. The inflation target is symmetrical; that is, preventing inflation from falling below the target is as important for the Riksbank as stopping it from rising above the target. Over time, the economy will then expand at its potential rate. The inflation targeting approach accordingly has a built-in control mechanism. If the monetary stance is unduly tight, bringing economic activity below the potential level, inflation will decrease and sooner or later fall short of the target; and vice versa. This calls for a calibration of the output gap, a new inflation forecast and an adjustment of monetary policy.