Hence, monetary policy works primarily by influencing expectations regarding future interest rates. Monetary policy may thus be more efficient if economic agents understand the central bank’s intentions in its interest-rate setting. In the November 2005 Inflation Report, Norges Bank first published its own forecast for the interest rate for the next three years. The aim is to enhance the predictability of monetary policy. With a predictable monetary policy, market participants can react to new information in a way that contributes to stabilising developments in output and inflation. We try to establish an interest rate path that provides a reasonable balance between the objective of stabilising inflation at target and the objective of stabilising developments in output and employment within a reasonable time horizon, normally 1 - 3 years. Interest-rate setting is also assessed in the light of developments in property prices and credit. The results of this trade-off are published in the Inflation Report in the form of a chart that presents central projections for the interest rate, the exchange rate, inflation and capacity utilisation in the economy. Underlying inflation has been lower than projected in recent months. Nevertheless, several factors point to higher inflation ahead. Capacity utilisation is high and there is little spare capacity in the Norwegian economy. Employment is rising rapidly and unemployment has exhibited a marked decline. There are signs of higher wage growth and expectations of rising inflation. At the same time, the krone exchange rate has depreciated from strong values.
This is currently my best assessment of the sustainable rate of unemployment in Sweden after having read a number of papers on the subject and having discussed the issue with several specialists in the field of labour market economics. 12 The lower repo-rate path is also better if one assumes a level of 6 per cent. 13 At a press meeting on 3 March, the Minister of Finance, Anders Borg, announced that the Ministry’s assessment of the equilibrium rate of unemployment has been revised downwards from 6 per cent to approximately 5 per cent by 2015. 14 The Ministry of Finance plans to publish its calculations in a ministry memorandum in connection with the spring budget bill 2011. One could perhaps object that it is not certain that the lower repo-rate path in panel a of Figure 8 is necessarily the best repo-rate path. It does, however, appear to fulfil the Qvigstad condition in that the inflation gap in panel c is mainly positive and the unemployment gap in panel d is also positive (for the entire forecast period if the sustainable rate of unemployment is 5.5 per cent and for most of the forecast period if it is 6 per cent). One can show that an even lower repo-rate path leads to a lower mean squared gap for unemployment but to a higher mean squared gap for inflation. It is thus no easy matter to stabilise both better. However, a somewhat different profile for the low repo-rate path may perhaps provide a better result.