The chart shows that Norges Bank’s changes in the key rate have less impact on money market rates now than earlier. In recent years, there has been an international trend towards increased focus on the need for monetary policy transparency. Under the auspices of the IMF and others the "Code of Good Practices on Transparency in Monetary and Financial Policies" was drawn up, which emphasises the importance of clarity, transparency and evaluation in monetary policy. This view of transparency and predictability contrasts sharply with the earlier practice of playing on the element of surprise. In monetary policy, this was associated especially with control of the exchange rate. In many countries, this approach was met with deteriorating credibility and high premiums for uncertainty. The effects of changes in monetary policy instruments became increasingly uncertain. Nevertheless, the consideration of predictability must not overshadow Norges Bank's obligation to set the interest rate at the level deemed appropriate by the Bank. The expectations of other economic agents must not control the setting of interest rates. There are a number of examples from countries with "transparent" monetary policies where interest rate changes have come as a surprise. This may  10  BIS Review 74/2001  be partly due to the fact that the central bank had a different view of the outlook for economic developments. Norges Bank has sought to promote transparency, for example by publishing our interpretation of the mandate for monetary policy and our assessment of the implementation of monetary policy.
Should any significant deviations between actual inflation and the monetary policy target occur, the Bank will provide an assessment of the reasons for this. 2  BIS Review 74/2001  Even though there was confidence in the implementation of monetary policy prior to the change in regulation, the communication of Norwegian monetary policy was clearly facilitated by the Government quantifying an inflation target. However, in our view the most important aspect of the shift to an inflation target is that political authorities clearly recognise that low inflation is a benefit in itself. History has shown that high inflation does not lead to sustained higher economic growth or lower unemployment. This recognition and the positive inflation track record in Norway since 1990 provide the Bank with a sound basis for conducting monetary policy. Implementation  In the light of the orientation of monetary policy in recent years, the new guidelines have been applied without any significant change in the conduct of monetary policy. The key rate is set on the basis of an overall assessment of the inflation outlook. Higher interest rates curb demand for goods and services and reduce inflation. Lower interest rates have the opposite effect. If evidence suggests that inflation will be higher than 2½ per cent with unchanged interest rates, the interest rate will be increased. If it appears that inflation will be lower than 2½ per cent with unchanged interest rates, the interest rate will be reduced. There is symmetry here.