The rule is robust to variations in government revenues and provides a stable framework for economic developments. The fiscal rule has been adhered to, which in itself makes a considerable contribution to stability. Monetary policy has been assigned a clear responsibility for stabilising the economy. Inflationary pressures are addressed using a different approach than earlier. Monetary policy keeps inflation under control. This may translate into high interest rates and in periods a strong krone. The alternative could have been higher inflation, with a continued contest for economic resources and persistently high wage growth. This would have resulted in a continued deterioration in business sector competitiveness year after year as a result of higher price and cost inflation in Norway than abroad. The experience of the 1970s and 1980s shows that inflation and wage growth do not have a stable anchor under these conditions. Inflation and wage growth would have continued to move up until monetary policy was tightened. Unleashing inflation is not a viable alternative. Why is unemployment rising? High labour costs, a strong krone and global stagnation are leaving a mark on Norway’s internationally exposed sector. Many enterprises will not be able to sustain activity given current market conditions and cost levels. Labour costs are also squeezing margins in some private service industries. More enterprises are competing on international markets. Moreover, even if allocations are growing, public entities have limited capacity for increasing employment because wage expenses have risen so sharply. Chart 11.
So we may feel that at a certain point we need to do something more, or we do not. But we can expect the effect to be relatively limited. Second, I think the framework we have set, results in something very different from what we had before. Having decided that we refinance at fixed rates for unlimited quantities, and with a large corridor between the deposit facility and lending rate means, the lending rate has become the ceiling and the deposit facility rate is the floor and markets tend to move the money market rates in between, with overnight rates at a very low level and the three month rate at a level which can be below the refinancing rate. As a consequence, the rates effectively paid by borrowers are much closer to the situation in the US or the UK than most people would imagine. FT: What does that mean in practice? That the main policy rate need not go any lower, or can’t go any lower? CN: I didn’t say that. FT: Or that the deposit facility rate can’t go any lower? CN: I didn’t say that either. But it is clear that the room for manoeuvre on the deposit facility is limited. What I mean is that if we keep the present framework, we cannot move much. That’s obvious. If we want to move more, we have to change the framework, which could cause inconvenience.