Underlying inflation is now estimated to be between 2 percent and 2½ percent, which is one percentage point higher than one year earlier. Chart 9: Norges Bank’s key policy rate projections Saving, investment and spending decisions are influenced by expectations concerning future interest rates. Communication on the future course of monetary policy, including the publication of key policy forecasts, therefore plays an important role. Even though the key policy rate has been kept unchanged, Norges Bank’s forecasts for the key policy rate ahead were revised down through 2013. The downward revision of the key policy rate forecasts primarily reflects lower growth forecasts for the Norwegian economy. There are also prospects that wage growth will be somewhat lower than envisaged earlier. Growth among our trading partners and interest rates abroad have been somewhat lower than projected one year earlier. At the same time, banks’ lending margins are somewhat higher than expected. Chart 10: Inflation and capacity utilisation The analyses in the latest Monetary Policy Report published in March suggested that the key policy rate should be held at today’s level in the period to summer 2015, followed by a  2  BIS central bankers’ speeches  gradual increase. With such a path for the key policy rate, there are prospects that inflation will be slightly below, but close to 2.5 percent throughout the projection period. Capacity utilisation may edge down over the next year and thereafter move up to close to a normal level.
The common thread of geopolitical tensions is that while they’re difficult to predict, they’re also impossible to ignore. On a backdrop of low r-star and slowing global growth, they drive businesses to be more cautious, more vigilant, and more conservative in their approach. Data Dependent, Not Data-Point Dependent The long-term factors driving low r-star and slowing global growth, as well as the more near-term geopolitical tensions, are afflictions from which we all suffer. So what’s the solution? Where do we as policymakers, researchers, and regulators go from here? At press conferences I’m often asked: if growth slows by X percent, or unemployment increases by Y percent, will that mean that the FOMC is going to do Z at its next meeting? If the Fed had a motto, it would probably be “data dependent.” When asked about this, it’s important to clarify that while I’m data dependent, I’m not data-point dependent. It’s not about being guided by one single data point—GDP or job growth—but by all of the data and information that tell us where the economy is, and where the economy is heading. Importantly, it’s not about looking at things merely as they are—it’s about trying to read how the economy is likely to evolve over the next couple of years, and what risks lie ahead, based on a broad range of evidence. Monetary policy is a long game. The policy decisions we’ve made this year will continue to have a ripple effect years into the future.