In an environment of low inflation, solid economic growth and low unemployment, a conflict may arise between inflation considerations and considerations relating to the real economy. In that situation, we would be less worried about low inflation than if real economic prospects were also weak. We can then choose to bring inflation up to target over a longer horizon, particularly if interest rates are already low and there are signs that financial imbalances are building up. With flexible inflation targeting, monetary policy can make an important contribution to stabilising the economy. When the economy is exposed to shocks, we can respond rapidly by adjusting the policy rate, as we did in 2008 and 2014. Nevertheless, monetary policy cannot assume primary responsibility for output and employment. The level of economic activity depends on overall economic policy, including wage and income formation, the tax and social security system and the functioning of the labour market. Monetary policy is only one component of this framework. 14  Norway as a financial investor  Norges Bank  While high public debt has made it difficult for many countries to cope with a downturn, Norway has been in a fortunate position. We have built up one of the world’s largest sovereign wealth funds. It has provided us with fiscal space both during the financial crisis and in the wake of the fall in oil prices in 2014. The first transfer of close to NOK 2 billion was made to an account at Norges Bank in 1996.
Can you explain the ECB’s assessment of how inflation is developing? Looking at incoming data, I would say that data are more or less in line with our expectations. But this has to be seen in a context where we had repeatedly overestimated future inflation rates. In the last years, we have repeatedly lengthened the horizon over which we would get back close to 2 percent. Mechanically updated projections suggest that the risk is present that we may again have to extend this horizon. And even if it’s slightly, it’s a repetition of a past pattern. And then you go into the question of credibility of monetary policy. BIS central bankers’ speeches  1  If you observe for example, that the price people are ready to pay for protection against inflation is zero, or very low, that’s not necessarily a good signal, as it suggests that they are not convinced there’ll be inflation. And that could be related to scepticism about the ability of the central bank to influence inflation even five years ahead – which would be quite serious. You cannot just reject that. Markets might be signalling that there could be some second round effects related to the fall in oil prices. Inflation expectations would then be hit at some point. Finally they could also reflect a very pessimistic view on the future, and that’s the more secular stagnation scenario where the falls of oil prices would be more the reflection of deep structural problems in the global economy.