History shows that price stability is the norm. High inflation is a phenomenon associated with monetary disturbances in times of war and need, and a 1970s and 1980s phenomenon associated with an unsound macroeconomic policy and undermining of the nominal anchor. In many countries, including Norway, the perception in the 1960s and 1970s was that strong growth and low unemployment could be achieved if only we were willing to accept somewhat higher inflation. But experience showed that this was not an option. Counter-cyclical policy through the 1970s in Norway and a number of other countries contributed to rising inflation. Inflation expectations were gradually revised upwards and inflation took hold at a high level. In both economic theory and practical policy, it was gradually recognised that there is no trade-off between inflation and unemployment in the long term. In the early 1980s, many countries again focused on the need to restore confidence in the nominal anchor. In Norway the shift in policy took place in 1986. Following the last devaluation of the krone in 1986, economic policy was oriented towards securing confidence in the fixed exchange rate system. A fixed exchange rate was an intermediate target for achieving low and stable inflation. The fixed rate policy was abandoned in 1992, and the experience of the latter half of the 1990s demonstrated that monetary policy cannot fine-tune the exchange rate. Norges Bank therefore placed increasing emphasis on low and stable inflation.
We assume that fiscal policy will provide some stimulus to aggregate demand and output in 2008 and 2009. A gradual increase in the interest rate will curb demand growth after a period. Household debt and house prices have increased markedly over many years to historically high levels. House prices may now seem somewhat high in relation to developments in income, interest rates, unemployment and housing construction. The prospects of a gradual normalisation of interest rates may restrain credit growth and the rise in house prices. The interest burden is low, but will increase as interest rates rise. Intensified competition in the financial sector has contributed to lower interest margins on lending, which has curbed the rise in interest expenses to some extent. BIS Review 80/2006  5  Monetary policy assessments and strategy The Executive Board’s assessment in Inflation Report 2/06 was that the interest rate may gradually – in small, not too frequent steps – be brought back to a more normal level, and that the sight deposit rate should be in the interval 2¾ - 3¾ per cent in the period to the publication of the next Inflation Report on 1 November, conditional on economic developments that are broadly in line with the projections. In the first half of 2006, the interest rate was increased in two increments of 0.25 percentage point, and the Inflation Report announced that there were prospects that the interest rate would rise further at approximately the same pace.