8 An exit from the krone market may be tight when many investors seek to shift out of krone positions at the same time. This can trigger a considerable depreciation of the krone, as experienced in autumn 2008. On the other hand, Norwegian securities can be perceived as safe havens because the associated credit risk is perceived to be low. Experience has also shown that international turbulence can in periods lead to an appreciation of the krone. A krone that is too strong can over time result in inflation that is too low and growth that is too weak. In that case, monetary policy measures will be taken. In Norway, the key policy rate is the relevant instrument. We still have room for manoeuvre in interest rate setting – in both directions. Foreign exchange interventions are not in principle an instrument suited to influencing the krone exchange rate over a longer period. It would only be relevant should the krone exchange rate move significantly out of line with that deemed reasonable in relation to the underlying fundamentals of the Norwegian economy, and should developments at the same time threaten the credibility of the inflation target. In addition, the interest rate weapon must have already been exhausted. Over the past decade, inflation has been low and stable. This shows that monetary policy has functioned effectively. Transparency about the response pattern and key policy rate forecasts reinforce the impact of monetary policy.
This has led to a considerable expansion of its balance sheet. The chart shows the wide swings in central bank balance sheets since the 2008 financial crisis. Expansion of central bank balance sheets has been particularly rapid in the UK, the US and Switzerland and somewhat more moderate in the euro area. As I mentioned earlier, the purpose of balance sheet policy is to stimulate the economy by lowering interest rates and funding costs in a situation where the key rate is close to zero. Central banks themselves emphasise that the positive effects of balance sheet policy are uncertain – and the effects must be weighed against possible problems. 6 There are four factors that can be highlighted here: First, it may be difficult for central banks to exit the markets once they have built up large bond holdings, and this would require considerable portfolio adjustments for households, firms and banks. Postponing a reversal of the measures could generate expectations that interest rates will remain very low for too long a period after the economy has recovered. This could in turn generate expectations of high inflation further ahead. Indeed, the connection between inflation and the money supply constitutes the second challenge. When a central bank purchases securities or provides longer-term loans to banks, the monetary base, i.e. banks’ deposits at the central bank, increases. There is no direct relationship between the monetary base and inflation.