But if severe shocks hit the economy, other areas of economic policy must play a key role. When the pandemic hit Norway, we cut the policy rate to zero. At the same time, fiscal support measures were implemented on a scale unprecedented in modern Norwegian history. The aim was to cushion the downturn and support households’ and firms’ income. Chart 6 Economic downturns are countered by rate cuts Norges Bank policy rate. Percent 1.75  1.75  1.5  1.5  1.25  1.25  1  1  0.75  0.75  0.5  0.5  0.25  0.25  0  0  –0.25  2015  2016  2017  2018  2019  2020  2021  2022  –0.25  Source: Norges Bank  The actions taken could not, however, prevent a situation where a large number of workers were suddenly out of work. The risk that the pandemic would leave lasting scars on the labour market was an important reason why we kept the policy rate at a historically low level for more than a year. Now that we can look at the years 2020 and 2021 in the rear view mirror, we can see that employment in Norway picked up more quickly than expected (Chart 7). Employment exceeded the pre-pandemic level in autumn 2021, and the same degree of monetary policy stimulus was no longer needed. We have now raised the policy rate twice, and we have signalled a further rise.
In the conduct of monetary policy, central banks look through temporary changes in inflation. An increase in individual prices, as we recently experienced with electricity prices, reflects shortages that monetary policy cannot, and should not, attempt to counteract. There is also a tradition in Norway for the social partners to largely look through unexpected fluctuations in prices and costs. Inflation is only likely to accelerate if broad groups, whether price setters or wage earners, demand compensation for higher costs. In that case, the central bank’s task is to tighten monetary policy. The rise in the inflation rate has come after several decades of low global inflation. Increasing international trade and competition is one important reason for the slow rise in prices in that period. High labour force growth, partly owing to labour immigration, has also had a dampening impact on wage growth in many countries. These drivers may be changing direction. We saw signs that globalisation was slowing down even before the pandemic. The pandemic may also have amplified a trend whereby an increasing number of businesses see the need to secure their own supply lines and locate more of their production chain closer to their customers. At the same time, labour supply is growing more slowly in advanced economies as the population ages. The period where some countries struggled with too low inflation appears to be over, and central banks may be facing more demanding trade-offs between meeting the inflation target and supporting employment.