According to the new regulation, “the operational target of monetary policy shall be annual consumer price inflation of close to 2 percent over time.” It is not possible to quantify precisely an optimal inflation target for the Norwegian economy. A numerical target of 2 percent is, however, consistent with the inflation target of most of Norway´s trading partners. In 2001, when inflation targeting was introduced, the Norwegian economy faced the prospect of gradually increasing oil revenue spending. It was widely expected that the phasing-in of revenues would entail an appreciation of the real exchange rate. At the time, the nominal target was set at 2.5 percent. An expected real appreciation could then occur partly in the form of wider price and cost differentials between Norway and its trading partners. The period of rising oil revenue spending now appears largely to be over. Thus, it is difficult to find compelling arguments for setting an inflation target in Norway today that differs from that of our trading partners. The new regulation is consistent with how monetary policy has been conducted in practice in recent years. The regulation states that: “Inflation targeting shall be forward-looking and flexible so that it can contribute to high and stable output and employment and to counteract the build-up of financial imbalances.” As long as there is confidence that inflation will remain low and stable, monetary policy can contribute to stabilising the economy.
When the economy is exposed to shocks, the central bank can respond rapidly by adjusting the key policy rate, as we did in 2008 and when oil prices fell in 2014. A flexible inflation targeting regime can reduce the risk of unemployment becoming entrenched at a high level following economic contractions. Nevertheless, monetary policy cannot assume primary responsibility for high output and employment. The level of output and employment over time depends on overall economic policy, including the tax and social security system, the wage formation process and the functioning of the labour market. Monetary policy is only one component of such an overall framework. 2/4  BIS central bankers' speeches  The importance of financial markets and financial stability was underestimated before the crisis – also by central banks. The financial crisis revealed how harmful financial imbalances can be. Monetary policy can in given situations take account of the risk of a build-up of financial imbalances. But monetary policy cannot take primary responsibility for heading off a gathering storm. Regulation and supervision of financial institutions are the primary means of addressing shocks to the financial system. The build-up of financial imbalances has in recent years been given little weight in monetary policy among the major central banks. Their focus has been on counteracting a deeper and more prolonged downturn and on preventing deflation. In countries that were less affected by the financial crisis, more attention has been devoted to financial stability considerations. In high-tech, global financial markets, capital moves rapidly between different currencies.